Accounting As An Information System And Accounting Terms

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Accounting Principles Board of The American Institute of certified Public Accountants (AICPA) declared functions of accounting is to provide quantitative information, primarily financial in nature about economic entities that is intended to be useful in making economic decisions. Accounting called as “Language of Business”. It is the primary means of communicating financial information to owners, lenders, managers, Government, and other regulatory agencies. It helps the users in taking better decisions. So we can say that accounting as an information system is necessitated by great complexity of modern business organizations.

Fig 1.3 Accounting Terms

Image of Accounting Terms

Image of Accounting Terms

Image of Accounting Terms

Accounting terms

Business Entity

Business entity means a specific identifiable business enterprise. An accounting system is devised for specific business entity. It is assumed that business has

Separate existence and its entity are different from that of its owner(s) in accounting. Every transaction is analyzed from the point of view of a business enterprise. It not depends upon persons associated with business.

Transaction

An event which involves exchange of value between two or more entities is transaction. It can be purchase of stationery, receipt of money, incurring expenses, etc. it can be cash or credit transaction.

Purchases

This term is used for goods which are purchased for resale or for producing the finished products, which are meant for sale. Goods purchased may be Cash or Credit Purchases.

Sundry creditors

Creditors are persons who have to be paid by an enterprise an amount for Providing goods and services on credit.

Sales

It is total revenues from goods or services provided to customers. It may be in cash or in credit.

Sundry debtors

Persons who are to pay for goods sold or services rendered or in respect of contractual obligations are called debtors. It is also named as debtor, trade debtor and accounts receivable.

Revenue (Sales)

It is amount by selling its products or providing services to customers. Revenue is also called Income.

Expenses

A cost incurred by a business in the process of earning revenue is called expense. Common items of expenses are: Depreciation, Rent, Wages, Salaries, Interest, Cost of Heating, Light etc.

Income

Difference between revenue and expense is called income.

Gain

This term usually is used for profit of an irregular nature I.e. capital Gain

Loss

Something against which firm receives no benefit is called loss.

Profit

It is the excess of revenue of a business over its cost. It may be Gross or Net profit.

Expenditure

Spending money for some benefit, service or property received is called expenditure. I.e. Payment of rent, salary, purchase of goods etc.

Drawings

It is amount of money or value of goods which proprietor takes from business to his private use.

Capital

It is amount invested by its owner. It is claim again assets of business. Any amount contributed by owner to business is a liability for business.

Assets

These are tangible objects or intangible rights owned by the enterprise and carrying probable future benefits.

Liability

It is the financial obligation of an enterprise other than owner’s funds. For example Stock, voucher, discount etc.

Role of Accountant in Society

  • Maintain proper books of accounts

  • Provide information and reports to management

  • Act as auditor for attestation of accounts

  • Act as internal auditor to assist

  • Strengthen the hands of management

  • Act as tax consultant to handle tax matters

  • Act as management consultant

  • To provide financial planning services