Let us understand the meaning of
Accounting but before that we should understand below terms-
Entity – An entity is a
status which could be Individual, Proprietor, Firm, Partnership, Company, Joint
Venture, Associate, HUF (Hindu Undivided Family) or any legal person who can
act.
Transaction – In general,
it is same as buying or selling of anything. In Accounting, transaction means a
business event, any exchange of goods or services or money with or without monetary
consideration. In Simple word, Transactions are the event which changes the
accounting equation during a period.
Now we understand that any entity
can do transactions with consideration or without consideration (but can be measured
in terms of money).
We can now better understand the meaning of Accounting –
Definition of Accounting -
“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 result thereof.”
In Simple words, Accounting involves
three step – Recording then Classifying and then Summarizing the Financial
Transactions in monetary terms.
Recording of transaction is known
as Bookkeeping. We record the business transaction in a book which is
called Books of Accounts. Then we classify the nature of transaction
(Purchase, Sale, Cash, Assets, etc) and book through journal in Books of
Accounts. Lastly we summarize all the transactions taken place during the
accounting year to know the actual performance of the entity.
Example - Suppose Mr. A
has started a business M/s ABC Traders. ABC Traders is a Separate Entity here.
Now Mr. A purchase goods from Mr. B of Rs. 50,000 on credit. Next day, Mr. A
sold the goods for Rs. 55,000 having worth of Rs. 40,000 to Mr. C and realized
the cash immediately.
Here, M/s ABC Traders has
involved in few business transactions which can be measured in terms of Money.
M/s ABC Traders purchase goods on credit from Mr. B is a transaction, then sold
to Mr. C on cash is another transaction. Here, difference between Purchase price
and Sale Price is Profit to the M/s ABC Traders and it can be understand as
below.
Later we will understand more in
depth about the Accounting and Finance.
Happy Learning !!!
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