Introduction to Accounting

It is the dimension, interconnecting and interpreting financial activity of an individual or a business organization. This is why Accounting is also widely denoted as a “language of business”. There are five types of accounts in accounting; those are assets, liabilities, owner, equity or Capital, expense and revenues. These accounts are the pillars of accounting. All the debit and credit transactions are performed on these accounts.

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In our day to day life we are to exchange goods and money with each other. For all these exchanges the financial conditions of related parties are changing every moment. We are intend to know by keeping proper accounting information that how much money is earned and how much is paid to other parties or how much is receivable and how much money is payable or how much is expended. We know that all the people in the society need to maintain some sorts of account. And today’s business world we are to submit these day to day accounts to someone. It is essential to maintain accounts to calculate profit and loss of the business, to know the financial condition of the business. For this reason one must introduced to Accounting.

Accounting is such a book which describes the best methods and techniques of recording the business transactions so that the business’s financial condition can be identified after a certain period. Mainly Accounting helps to determine the financial condition of an organization by preparing the financial reports of the particular organization.

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What is a transaction?

 

Meaning of Business transaction

The main basis of accounting is the transactions. Actually accounting is maintaining the accounts related to the business transactions. So, it is a kind of mandatory to have a clear concept about business transactions before you learn Accounting. Now, let me introduce you the term ‘an event’; an event is everything happens in human life. There are basically two types of events; monetary events and non-monetary events. But each type of event is not a transaction. Only monetary events are to be transactions. Transactions are basically business transactions. That means, the events which involves two or more entity or persons and cause a financial change to their financial conditions are actually called transactions. For instance; Mr. ‘P’ buys a T-shirt of $35 from ‘X-Men’ T-shirt. So, there are some conditions that makes an event a business transaction; those are-

• Involvement of two or more parties,

• Involvement of money/ currency, and

• Financial changes to the related parties.

Features of business transaction

We know that every single event is not a transaction because there are some features that must be present in an event to be called it a transaction. Those are being discussed shortly bellow:

i) Changes in the financial condition

Prerequisite of an event to be a transaction is that it must cause change in the financial condition of the parties involved of that particular transaction. Suppose a businessman has bought a machine which costs $10,000 for his business. It is a business transaction because the financial condition of the businessman has changed due to cash outflow of $10,000 on the other hand the seller has got cash inflow of the same amount.

ii) Measurable in cash

The transaction must be measurable in cash/ currency otherwise it will not be a transaction. So, the pen you got as a gift from your friend it not a transaction because the gift may have a price but it is not expressed to you. On the other hand, if you buy a pen for $3 then it is indeed a transaction because the value of the pen is recognized so do the seller got some revenue against it.

iii) Two parties involvement

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Every transaction must have two parties; one will receive (creditor) and another (debtor) will provide a goods or service. It is not possible to make a transaction by a single person. Suppose, Mr. X buys a table for his office for $75 from Otobi furniture. Here the two parties are Table and cash.

iv) Independent and self-liberated

Each and every transaction is self-liberate and independent in nature. That means one transaction is separate from another. There might be more than one transaction with the same person but the each of them is separate and individual from one another. Suppose Mr. X buys an electronic fan from E-electronics for $75. And E-electronic buys 1000pairs of screws for $1000 from Mr. X. The entities are same but the transactions are different and individual.

v) Invisible transaction

There is another kind of transaction which is not visible to eyes but it is also entitled to a transaction. Those are called the invisible transactions. Suppose, you bought a machine for your manufacturing plant which costs $15,000 and will last for five years. Every time you run the machine the productivity of the machine will be reduced gradually and the loss of productivity by the machine is recognized as the depreciation, where the transaction of production and losing of machine’s productivity are two parties’ invisible transaction.

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