Thursday, May 20, 2010

Purposes and the fundamentals of the Double-Entry System


PURPOSES OF ACCOUNTING AND THE FUNDAMENTALS OF THE DOUBLE-ENTRY SYSTEM

Accounting may be defined, in a elementary way, as the systematic process of recording, classifying, summarizing, interpreting, and analyzing financial information for decisiĆ³n making and for future reference, regarding the economic activity of an organization.

Accounting performs several important tasks:

· Recording daily business transaction in a significant manner and in terms of money.

· Classifying the recorded information.

· Summarized the recorded and classified information.

· Interpreting and analyzing the recorded information.

The accounting process is based upon the following five fundamental elements:

ASSETS- Everything of value a firm owns.

LIABILITIES- The debts owned by a firm.

OWNER`S EQUITY- The economic rights or equities of the owner or owners of a business.

REVENUES- The products of the business.

EXPENSES- The cost incurred to produce revenues.

The relationship between the fundamental elements is shown by the accounting equation:

Assets = Liabilities + Owner`s + Revenues - Expenses