Accounting Concept- Part One

 

Accounting Concept

Understanding "Business" Is Fundamental before learning Accounting

One could not understand Accounting  and its concepts if he couldn't able to Understand Business 

Now, what is Business Activity?

Any activity which is undertaken to earn PROFIT is business.

Like a doctor earning a salary in a Hospital is making INCOME but not PROFIT. So his activity is not "Business Activity"

WHY?

If he is attending 1 patient daily or 100 it will not affect his monthly salary as it is the same monthly or annually.

One Patient

OR

Several, Earning is the same

BUT

If the same Doctor Opens his own Clinic, now attending the number of patients matters to him and his Income and Profit will increase or decrease with the increase or decrease of his business activity.

So in business, the level of business activity affects the income of the Business.

More business activity means more income and profit. That is why every Business try to increase its Sale or number of Clients with the help of Marketing Tools.

So the doctor in order to promote his business makes advertisements so that he may gather more and more clients and increase his income and profit.

Classical View about Business

"Need and Wants"

People require Goods and Services in order to satisfy their needs and wants.

But they Can't produce all of them, what their need and wants is.

Exchange of Goods and Services is BUSINESS

So they produce those goods which they are experts in or they specialize in certain goods and produce them but not all of them which is practically not possible. But as a matter of fact, there are many other goods which are their needs and want. So everyone is producing one or two goods or services and specializes to produce more and more

WHY?

Because they Exchange them to get those goods also which they are not producing but they require them in order to satisfy their need and wants, hence Started BUSINESS 

So Exchange of goods and services is business, old form of business is "Barter System"

Understanding Basics Of Accounting

Accounting Starts when business starts. To start a business one has to bring some amount (wealth) into the business as an investment. This is called financing the business. There are only two types of finance.

1) Equity Finance (which is the owners own investment not borrowed money) also called Capital 

  2) Debt Financing (Borrowed money or debt investment i.e as a loan)

So both finance comes in the shape of wealth i.e, Assets.

Equity finance may come in the shape of money, building, car or machinery, etc. they all are wealth. 

The accounting name of wealth is "Assets". 

Likewise, debt financing is also in the shape of money from the bank or any borrowed assets.

So here we come to the conclusion that all the assets of the business equal to the equity investment and debt investment. 

Assets = Equity + Debt

OR

Assets = Capital + Liability

This is called Business or Accounting Equation

This equation clearly shows the strength and weaknesses of the business. for example, if the equity portion is heavy than the debt the business is in a good position, or it's viable to invest in this kind of business or vice versa.

That is why it is called the Balance Sheet of the business or the financial position of the business.

Now one thing is noticeable that wealth is the key of every business, every businessman starts his business activity just in order to increase his wealth so that more and more wants could be satisfied by him. An increase in wealth or assets is the basic objective of every business. 

So accounting basic ideology is asset recording. All of its principles are made from the point of view of assets. 

let's start to look at this in more detail.

Recording the financial transaction of the business is the work of accounting. 

Now, what is a transaction?

 It is the business dealing between two or more people. And what is that dealing mean? 

It's EXCHANGE. The same concept business is defined with "Exchange of goods and services is business".

So if we look at the 'transaction' from the point of view of assets as we know accounting is the record of 'Business Assets'. 

It is the exchange of Assets in a business transaction, so in almost every transaction there is an asset that is going out of the business in exchange for other assets coming into the business. So there is an increase or decrease of assets in every transaction of the business and accounting is going to record that effect until the final position of these transactions is calculated.

So from the point of view of assets, the accounting principle is that "every increase in assets is denoted by 'Debit', and every decrease in assets is denoted by 'Credit' ". 

to be continued.........