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Lecturer
Introduction to Accounting Department of Accounting & IS
University of Dhaka, Dhaka-1000
Definition of Accounting:
Accounting is an information system that identifies, records, and communicates the economic
events of an organization to interested users.
Accounting refers to the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information.
--- American Accounting Association
Accounting is the art of recording, classifying, summarizing in a significant manner in terms of
money transaction or events which are in part of at least of a financial character and
interpreting thereof.
---American Institute of Certificate Public Accounting
Three Activities:
Though accounting deals with so many aspects, it basically focuses on three activities, which are
as follows:
1. Identification of transactions
2. Recording of transactions
3. Communication of information to interested users
Again the recording part of accounting deals with three activities, which are:
a. Analyzing transactions
b. Journalizing transactions
c. Posting transactions to ledger
So, we can diagram the three activities of accounting as follows:
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Objectives of Accounting:
The main objective of accounting is to communicate the necessary information to interested
users so that they can take economic decision, and the primary objective of accounting is to
record all the transactions properly. Other objectives include the following:
1. To provide information about the financial position of an organization
2. To provide information about the financial performance of an organization
3. To provide information about the cash position of an organization
4. To help an organization to identify the profitable units or segments
5. To help an organization to add or drop a product line
6. To help an organization to determine the cost of a product
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Definition of Transaction:
A transaction is a business event that has a monetary impact on an entity's financial statements,
and is recorded as an entry in its accounting records. Examples of transactions are acquiring
property or paying supplier bills.
Types of Transaction:
Transactions can be classified from various points of view. The general points of view are as
follows:
1. On the basis of event/occurrence:
a. External transactions: External transactions are those that occur outside the
organization. Examples include purchase of goods, sale of goods, payment of
salaries, etc.
b. Internal transactions: Internal transactions are those that occur inside the
organization. Examples include charge of depreciation, use of supplies, recording
bad debts, etc.
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4. On the basis of visibility:
a. Visible transactions: Visible transactions are those that we can see occurring.
Examples include purchase of goods, sale of goods, payment of salaries, etc.
b. Invisible transactions: Invisible transactions are those that we cannot see
occurring. Examples include charge of depreciation, use of supplies, recording
bad debts, etc.
Basis of Accounting:
Accounting has two bases: cash basis and accrual basis.
1. Cash Basis: Under cash basis of accounting, income is recorded when it is received and
expense is recorded when it is paid. Examples include sale of goods for cash, purchase of
goods for cash, etc.
2. Accrual Basis: Under accrual basis of accounting, income is recorded when it is earned
and expense is recorded when it is incurred. Examples include sale of goods (for cash or
on account), purchase of goods (for cash or on account), etc. Modern accounting is
established on accrual basis.
Types of Accounts/Elements of Accounting:
Accounts can be classified into the following five types:
1. Assets: Assets are the resources owned and controlled by an organization, which will
provide future benefit to the organization. Examples include cash, accounts receivable,
bank deposit, land, equipment, buildings, goodwill, patent etc.
2. Liabilities: Liabilities are the present obligations that occurred as a result of transactions,
which will require future outflow from the organization. Examples include accounts
payable, notes payable, salaries payable, unearned revenue, etc.
3. Owners equity: Owners equity is the residual claim over assets after deducting
liabilities. Examples include owners capital, owners drawings, etc.
4. Revenue: Revenue is the gross inflow of economic benefits arising from the ordinary
operating activities of an organization in the form of inflow, enhancement of assets, or
decrease of liabilities that result in increase in equity. Examples include sales revenue,
rent revenue, service revenue, etc.
5. Expenses: Expenses are the decreases in economic benefits in the form of outflow,
depletion of assets, or incurrence of liabilities during the accounting period that result in
decrease in equity. Examples include salaries expenses, insurance expenses, etc.
The End
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