INTRODUCTION TO ACCOUNTING

Accounting is the process of recording financial transactions pertaining to an organization. It is a systematic process of identifying, measuring, recording, and communicating of financial information.

Importance of Accounting

• Helps to keep a record of business transactions.
• helps to ensure that a company’s financial statements are legally and accurately reported.
• Helps to facilitate decision-making for management
• Helps to communicate results

Types of Accounting

• Managerial Accounting: This accounting analyses the information gathered from financial accounting. It involves the presentation of financial information for internal purposes to be used by management in making key business decisions. Managerial accounting is useful for companies to track and craft spending budgets, reduce costs, project sales figures, and manage cash flows, among other tasks. The three pillars of Managerial accounting are; Planning, Decision-making, and Controlling. In addition, forecasting and performance tracking are key components.

• Financial Accounting: Financial accounting involves the preparation of accurate financial statements. The focus of financial accounting is to measure the performance of a business as accurately as possible. It is the field of accounting concerned with the summary, analysis, and reporting of financial transactions related to a business. Financial accounting can be Qualitative and Quantitative. 

ACCOUNTING CYCLE

This is known as the accounting cycle, and involves such activities as recording business transactions throughout the accounting period, adding any required adjusting entries, producing financial statements, and closing the books for that period

1. Identifying and Analyzing Business Transactions: The first step includes the preparation of business documents, or sources documents. A business document serves as a basis for recording a transaction. The objectivity concept states that an accountant cannot verify any information without evidence (Source document)
2. Recording in the Journal: It contains the chronological record of an entity’s transaction. Business transactions are recorded using the double-entry bookkeeping system. Journals are also known as Books of Original Entry.
3. Posting to the Ledger: Also known as Books of Final Entry, the ledger is a collection of accounts that shows the changes made to each account as a result of past transactions, and their current balances.
4. Trial Balance: A trial balance is prepared to test the equality of the debits and credits. All account balances are extracted from the ledger and arranged in one report. Afterward, all debit balances are added. All credit balances are also added. Total debits should be equal to total credits.
5. Adjustment: Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered into the books.
6. Closing account and stock valuation: Adjusting entries are prepared to update the accounts before they are summarized in the financial statements.
7. Financial statements: The financial statements are the end-products of an accounting system. A complete set of financial statements is made up of; Statement of Profit or Loss account, Statement of Changes in Equity, Statement of Financial (4) Statement of Cash Flows, and Notes to Financial Statements.