Accounting is the recording, reporting and analysis of financial transactions of an organization. Every single business out there must use accounting to not only draw up their financial statements, but to report what is going on in the business and to comply with the law.
History of Accounting
A great history of Accounting can be found here:History of Accounting
In the ancient days people needed to keep track of money coming in and going out and so simple accounting was introduced. The accounting practice then became more sophisticated because of Tax payments.
Mechanics of Accounting
In the Single entry system a transaction is recorded to one account. This system of accounting is used mainly in small organizations that carry out few transactions and merely want to determine the profits and losses they incur. These organizations usually maintain records of Bank/Cash On hand, Accounts Receivable, Accounts Payable and Tax Payments. An accountant would be able to compile an Income Statement and Balance Sheet if additional information is provided. The single entry system comes with rather more disadvantages than advantages. Its most obvious advantage being that it is
easy to use. Its disadvantages are that:
1. Data is quite shallow and so cannot be used in effective planning for an organization.
2. Theft is likely to go undetected.
3. There is no check of data capturing errors.
4. Omission of detailed data concerning Assets and Liabilities.
This is the standard form of recording transactions in a business and it is governed by the accounting equation Assets=Liability + Equity. This system of accounting uses both the debit and credit to record a single transaction. The transaction is also recorded into two accounts; a debit entry in one account and a contra credit entry in the other account.
The debit and credit entries are of equal amounts. The double entry system checks that every account is in balance. The general rules to be followed when using the double entry system are:
1. An increase in an Asset requires a debit entry whilst a decrease requires a credit entry.
2. An increase in a Liability requires a credit entry whilst a decrease requires a debit entry.
3. An increase in Owners Equity requires a credit entry whilst a decrease requires a debit entry.
4. Income is always a credit entry whilst an expense is always a debit entry.
When using the double entry accounting system one can check for accuracy and errors by compiling a trial balance. If the total debits and total credits are not equal there will be an error. Perhaps one of the few errors that can not be easily detected even when using the double entry system is when an amount is posted to the incorrect account and a contra entry is also posted.
1. Easy detection of theft and fraud.
2. Data Capturing errors are picked up easily.
3. Assets and Liabilities are included in the organization’s books.
4. Financial Statements can be compiled from ledger accounts.