Basics of Accounting

Basics of Accounts

Here is a small story to begin with: “Cheers to all “says Rahul to all his friends in a restaurant. It was party time and Rahul was giving treat to his friends after getting the MBA results.  Rahul is excited about his plan. Rahul is a very hard working and dedicated person.  He is commercially savvy and sees the need for a shopping Centre (retail outlet) at his locality. Rahul has researched his idea and has prepared a business plan that helps him to start a new business. Rahul decides to keep the name as Rahul Stores. He wants to keep everything in the store so that people need not go out to buy other things. He met an attorney to discuss the form of business he wants to use.  The attorney also advised him about the various permits and government identification numbers needed for his business. Rahul wants someone to help him out in his business to take care of the accounting part. He decides to utilize the services of his brother and decides that with a little training, his brother can easily pick up the tricks of the trade. The business takes off on the first day without much fanfare and only one customer has visited the shop.  She has purchased a toy for her baby. She pays money for the toy and collects the bill.

Rahul explains to his brother that the transfer of money from the customer to the shop is called as a '*transaction*'. This is the first step of accounting process. After identifying the transaction, it has to be measured in terms of money. Rahul explains to his brother that the money given by that woman has to be measured.  *Measuring* is an important challenge for the accountants and business entities. After measuring, all transactions it will be recorded in a journal.  Rahul’s brother asks a question “what is a journal?” Rahul continues to explain that journals are the books in which all the transactions are recorded first. Purchase of toy will be recorded in journal. *Recording* of journal alone will not make sense. It has to be presented in a manner so that it is useful to the intended users. Rahul further explains his brother that after recording the transaction the next step will be classification. Grouping of *similar transactions* for different dates called as classification. All these grouped transactions will be recorded in one single book called *ledger*. This means that all the transaction that is recorded in the books of journal is transferred to the book of ledger. Rahul’s brother questions him “What does similar transaction mean ? “. Rahul explains "Suppose there are lot of purchases then all the purchase of goods made for cash or credit on different dates will be entered in purchase account". After posting the transactions in ledger it is summarized. *Summarizing* is done mainly, to know whether the objective was achieved. So, it is necessary to summarize all the transactions that is has occurred and recorded. Rahul says to his brother that they have to summarise all the transactions that has happened on monthly basis by preparing all the statements and balance sheet.

Rahul questions his brother “Now tell me what would be the next step after summarizing? “. His brother thinks for a while and guesses it right. Ha says  “Analysing is the next step”. So Rahul feels happy to know that his brother has understood the process well. Further, he explains to his brother that *analyzing* is done to identify financial strengths and weaknesses of any business. His brother asks Rahul “how to identify the financial strengths and weaknesses” ? Then he says it can be identified by using various tools like ratio analysis, fund flow analysis and cash flow analysis. He asks his brother to go through some of the analysis done by other companies to understand the concept. *Interpreting *is the next step which gives judgment about the financial position and profitability to the business. This will help to know whether the business is moving in the right path. Finally the communication is done by giving all the reports  Rahul completes his explanation on accounting process to his brother and asks him to go through all these steps while handling every transaction. It was late night and time to go home. They close the stores and go back home.