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definition of accounting
What is accounting?

Accounting: Accounting is a process in which financial transaction of a business is analyzed, recorded, classified, summarized, interpreted and communicated to the user.


Types of accounting:

The term ‘Accounting can be classified into the following broad categories'

  • Financial accounting: Reporting of the financial position and performance of a firm through financial statements issued to external user on a periodic basis.
  • Cost accounting: Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management about the most appropriate course of action based on cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operation and plan for the future.
  • Management accounting: Management accounting is an accounting that is concerned with provisions. It uses account information in order to inform about the best courses of action. It involves analyzing and measuring information in order to pursue to an organizations goals.

Concepts of accounting: The concepts of accounting are following.

  • Money measurement concept: Money measurement concept means every recorded event or transaction has to be measured in terms of money. That’s mean an event or transaction which cannot be measured in terms of money will not be recorded.
  • Business entity concept: Under a business entity concept a business organization is separated from other businesses. Business organization and its owners are also treated as two separate parties. This called a business entity concept. This is done because a business should not include or record transactions or assets of another business as well as personal transactions or assets of its owner.
  • Going concern concept: Going concern concept holds that financial transaction of a business are prepared assuming that business will continue to operate for the foreseeable future and has no intention to shut it down.
  • Cost concept: Cost concept holds that the price of an asset is what amount is used to buy it should be written. Market price will not be written here.
  • Dual-aspect concept: Dual aspect concept indicates that each transaction has two aspects and recorded on two different accounts. For example, if a company buys a machine on cash basis then both machine and cash account will be affected.
  • Realization concept: Realization concept holds that revenue is recognized by the seller when it is earned irrespective of whether cash from the transaction is received or not.
  • Accrual concept: This concept holds that business transaction are recorded when they occur not when the related payment is received or made.

Accounting conventions: Accounting conventions are followings

  • Consistency: Consistency means when a business entity follows a particular method, then it should follow this particular method in years to come. For example, if a business follows the straight line method for charging depreciation, then it should follow it consistently. If it does not follow and adopt another method, then it balance sheet figures will mislead or will not match.
  • Conservatism: According to this convention, accounts follows the “Anticipate no profit, but provide all possible losses’’. On this convention, the inventory is recorded as cost or market price whichever is lower. Similarly creates a provision for bad and doubtful debts.
  • Materiality: This convention allows accountant to ignore events which are small or negligible in amount.
What is accounting? definition, concept and convention of accounting
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