Introduction to Accounting - Chapter 1 – Fundamentals of Accounting

Definition

 Accounting provides financial information about an economic entity (any unit that
exists independently), which will enable us to make better economic decisions.
 Bookkeeping is the process of recording transactions and keeping financial records.
(In the past: Keep in books; In the present: Computers)

Difference between Accounting and Bookkeeping

 Bookkeeping is just the process of recording transactions and keeping financial

records
 But accounting is not simply about bookkeeping, it includes further process such as
classifying, summarising and communicating
 Accounting provides different types of users with information that can be useful for
them in decision-making

4 Major Functions of Accounting

Recording All daily transactions of firms are carefully recorded and become
Transactions accounting data
Classifying Data Accounting data are classified according to their nature
Summarising Accounting data are summarised to provide relevant information for
Data users and they are presented in different types of financial statements
Income Statement -> Summarise Financial Performance
Balance Sheet -> Summarise the Financial Position of a business
Communicating Users are provided with financial statement
Information Accountants extract relevant information when communicating to
different users and explain the key results with terms, graphs and ratios
Different users have different concerns, so it is not easily understand by
the public

1 S4 BAFS Chapter 1 – Fundamentals of Accounting

 Accounting Steps

Transactions Data Information Decision-making

Recording Classifying Communicating

Summarising

Accounting = Recording (Bookkeeping) + Classifying and Summarising + Communicating Information

Importance of Accounting

 Accounting provides financial information about a business -> Useful for decision
making
 Different people and organization (stakeholder) need this information (E.g. Business
Owners, Management, Potential Investors, Inland Revenue Department)
 If there is no accounting, people will not know the actual financial situation, it will be
unable to make informed decisions

The Accounting Cycle is a series of standard procedures for the recording and processing of
a firm’s accounting data in a certain period, usually a year. The same procedures have to be
repeated period after period.

General Locations of Accounting

1 Books of original entry Record business transactions

2 Ledgers (分類帳)
3 Trial Balance (試算表)
4 Period-end Adjustment
5 Financial Statements
Post accounting data from books of original entry to
ledger accounts
Show all the account balances after balancing off
accounts at the accounting year-end
Items showed in the trial balance may be adjusted
Income statement and statement of financial positions
are prepared at the accounting year-end

2 S4 BAFS Chapter 1 – Fundamentals of Accounting

The Accounting Cycle

1 / Collecting and verifying source documents for the

business transactions
2 Recording Books of Recording the transactions in the books of original
original entry entry
3 Posting the entries from the books of original entry
Classifying to ledgers (One book to another book)
4 Ledgers Balancing off all the accounts in the ledgers

5 Summarising Preparing a trial balance in order to test the

Trial Balance arithmetical accuracy of double entries made in
the ledger accounts
6 Period-end Preparing adjusting entries for accruals,
Adjustments prepayments or estimated expenses
7 Preparing financial statements (Income statement
Financial / balance sheet) at the end of accounting period ->
Communicating Statements Report the financial performance and position
8 Prepare closing entries

3 S4 BAFS Chapter 1 – Fundamentals of Accounting