Businesses are constantly evolving and shifting towards new financial operating systems from time to time, there are constant updates in the world of accounting, we need to dive deep into the financial world to get to know the various financial systems and the way it directly help businesses to optimise, effectively manage and carry out the business. Financial Accounting plays an integral role in any business, it is the backbone of the company, as with the help of accounting the business as well as the stakeholders are able to understand the true and fair view of the business and its future expected growth.
In order to be well versed in the subject matter of accounting one must have a clear understanding of the following common business expressions which are commonly used in the business accounting.
Book-Keeping:
- Book-keeping is the foundation/base of Financial Accounting, usually carried out by the junior staff.
- The ultimate objective of Book-keeping is to maintain a systematic record of day-to-day business transactions and necessary events of financial nature in order of its occurrence.
- Book-keeping is to summarise the cumulative effect of all economic transactions of business for a given period by strategically maintaining a permanent systematic record of each and every business transaction with its evidence and financial effects on accounting variable.
- Output of book-keeping is an input for Financial Accounting.
Accounting:
- Accounting is the language of business. We use this language to communicate financial transactions and their results. Accounting is a strategic framework and a comprehensive system to collect, analyze and communicate financial information.
Definition by the American Institute of Certified Public Accountants (Year 1961): "Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof".
Definition by the American Accounting Association (Year 1966): "The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of accounting".
Financial Accounting:
- Financial Accounting is primarily termed as accounting, it forms a base/foundation for the financial business transactions. It not only helps with the establishment of final accounts but also helps to take better decisions by fostering a real time comparison between the current and previous quarters or years.
- Financial Accounting is based on the monetary transactions of the business/company.
- Its main focus is on recording and classifying monetary transactions in the books of accounts and preparation of financial statements at the end of each accounting period.
- Reports/financial statements as per Financial Accounting are meant for the management as well as the shareholders and various stakeholders of the company.
- Financial Accounting ascertains, evaluates and exhibits the financial strength and a true and fair view of the company.
- The purpose of Financial Accounting is to find results of operating activity of the business, analyzing and further interpreting the reported financial information for informed decisions.
- The output of accounting permit informed actions, perceptions and accurate decisions by the users of accounting information.
- Financial Accounting is considered as the language of business.
Definition by the American Institute of Certified Public Accountants (Year 1961): "Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof".
Cost Accounting:
According to the Chartered Institute of Management Accountants (CIMA), Cost Accountancy is defined as "Application of costing and cost accounting principles, methods and techniques to the science , art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision making".
- Cost Accounting is the process of accounting for costs from the point at which the expenditure is incurred or generated to the acertainment of its ultimate relationship with various cost centres and cost units. It is a system of accounting which is concerned with output of costs of doing a certain activity which can be manufacturing or rendering services.
- Cost accounting is associated with determination of costs relating to a particular process, product or activity. It is the way to capture the total production cost of an organisation by taking into consideration the costs associated to each production process.
- The cost accounting is a significant system of ascertainment of costs, developed for management. It helps the internal management to take the best decisions, as the cost accounting provides with enough clarity pertaining to the costs associated to various processes.
- Cost accounting is a formal system of accounting by means of which costs of various products or services, are ascertained and controlled.
Whelden defines Cost Accounting as, “ Classifying, recording and appropriate allocation of expenditure for determination of costs of products or service and for the presentation of suitable arranged data for the purpose of control and guidance of management”.
Cost:
- The Institute of Cost and Works Accountants of India, defines cost as “measurement, in monetary terms of the amount of resources used for the purpose of production of goods or rendering services”.
- Cost means the amount of expenditure incurred or attributable to a given thing. It is considered as the price to be paid to attain the objective.
- Cost is a resource sacrificed to achieve a certain objective.
Management Accounting:
- Management Accounting is concerned with the use of Financial Accounting and Cost Accounting information to managers within organisations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and cost control functions.
- The data of both the Financial Accounting and Cost Accounting is taken into consideration and used for accurate decision making by the management of the business/company.
- Management Accounting provides the necessary financial information to the management to assist/guide them in the crucial procedure of planning, controlling, performance evaluation and decision making activities of the company.
- The reports prepared in Management Accounting are meant for the internal management and as per their requirement.
Accounting Standards:
- Accounting standards provide the framework and norms to be followed in accounting, so that, the financial statements of different enterprises become comparable.
- Accounting standards are written policy documents issued by expert accounting body or by government or other regulatory authorities covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statement.
- Accounting standards ensure the consistency and comparability of the financial statements presented by different enterprises creating a general sense of confidence that users have in the fairness and reliability of the statements they rely upon.
Transaction:
- It means an event or a business activity which involves exchange of money or money’s worth between parties.
- A business transaction is an economic event of exchange of value, typically between two or more parties, involving the movement of money, goods, or services. These transactions are measurable in monetary terms and are essential for a business to track and record for accounting purposes.
Goods or Services:
- These are tangible articles or commodities in which a business deals. These articles or commodities are either bought and sold or produced and sold. It depends on the company’s costing analysis and estimations whether to opt for in-house production or outsource.
Profit:
- Profit is the core element and primary objective behind any commercial activity. Profit is defined as the excess of revenue income over expense. It could be calculated for each transaction or for the business as a whole to depict a picture whether the business is earning any profit.
Loss:
- The excess of expense over income is known as a loss, it could be calculated for each transaction or for a business as a whole. The losses should always be to the minimal as it will help the business to grow.
Asset:
- Asset is a resource owned by the business with the ultimate objective of using it for generating future profits.
- Assets can either be tangible or intangible in nature.
- The capital used for funding any sort of asset is called as a capital expenditure. Capital assets or tangible assets are the ones which have some physical existence where as the capital assets which have no physical existence and whose value is limited by the rights and anticipated benefits are known as intangible assets. Intangible assets cannot be seen or felt although they help to generate revenue to a certain estimated future timeline.
Liability:
- It is an obligation of financial nature to be settled at a future date. It represents amount of money that business owes to the other parties. Liabilities can be short term or long term in nature it is the amount of money which needs to be settled against the creditors of the company.
Contingent Liability:
- Contingent liability is an uncertain liability it represents a potential obligation that could be created depending upon the outcome of an event. It is a liability which is uncertain in nature which primarily depends on the happening or unhappening of an event.
Capital:
- It is the amount invested in the business by its owners. It may be in the form of cash goods or other assets which the proprietor or partners of the business invest in the business activity.
- From the business’s perspective, capital of owners is a liability which is to be settled only in the event of closure/dissolution or transfer of the business. Hence, it is not classified as a normal liability but showed as capital in the liabilities side itself. .
Drawings:
- Drawings represent the amount of money the partners have withdrawn from the business for personal use.
- Drawings are shown on the debit side of the Partner’s Capital Account in the terms of accounting.
Debtor:
- The sum total or aggregate of the amount which the customer owes to the business for purchasing goods on credit or services rendered in respect of other contractual obligation, also known as sundry debtors or trade debtors. Debtors are the assets of the company as they are the receivables of the company.
Creditor:
- A creditor is a person to whom the business owes money or money’s worth. Money favour to supply of goods or providers of service are the creditors and generally represent as the liabilities of the business.
Trade Discount:
- It is the discount usually allowed by the wholesaler to the retailer, computed on the list price or the invoice price.
- A trade discount is the amount by which a manufacturer reduces the retail price of a product when he/she sells to a reseller, rather than to the end customer. The reseller then charges the full retail price to its customers in order to earn a profit on the difference between the amount by which the manufacturer sold the product to him/her (retailer) and the price at which he/she then sells the product to the final customer.
Cash Discount:
- Cash discount is an allowance /discount to encourage payment from the debtor. This has to be recorded in the books of accounts and is calculated after deducting the trade discount, if any.
