Saturday, February 2, 2008

Understanding The Accounting Concept

People sometimes confuse between accounting and mathematics although they are both extremely different.

It is true that Accounting involves the use of mathematics, but, only the basics are needed such as additions and subtractions.

Accounting is defined as an information system that Identifies, Records and Communicate economic events to interested users.

The users of accounting may be internal users such as the managers of the company or external users such as tax authorities, investors and creditors.

In order to understand these functions, take a fast food restaurant as an example:

1-Identify : The restaurant has made a sale of $1,000 of hamburgers today, paid salaries of $300 and purchased tools for $400

2-Record : In order to prevent loss of data, previous data must be recorded. In accounting financial data are recorded in a book called a journal .There are 2 types of journals

a-special journals :Certain accounts has a special journal such as Sales journal or Cash receipts Journal

b-General journal :For accounts that do not have a special journal such as depreciation.

3-Communicate : The most important function of accounting is communication. In accounting communication is done through the financial statements which are :

a-Income statement

b-Statement of changes in owners equity

c-Cash flow statement

d-Balance sheet

Companies are required to prepare such statements and present them to the public, so that investors can make their wise investment based on the analysis of those statements.

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