Accounting – Definition
We tried to explain the basics of accounting in a simplified manner in the last post on accounting…
Now the next intriguing thing, where do debits and credits come in? We go to the bank, the bankers tell us they debited charges or credited interest… This does baffle us, especially when we are not accounting students / professionals. Quite often, even accounting students face this challenge.
But before we go there, let us understand to fundamental types of accounting:
- The single entry system
- The double entry system
Accounting is a post facto recording of financial transactions. The American Institute of Certified Public Accountants defined accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.”
Coming back to the two fundamental types of accounting, a single entry system is simply making a note of transactions in a notepad, and deciphering the results over a reasonable / defined period of time. You may maintain separate sheets for some specific types, like for purchases, for sales, for amounts outstanding in credit sales etc. Maintain a cash account for the amounts received and spent.
This is something which everyone does, and simplicity is the forte of this system.
Double accounting will be covered in the next post, conceptually…….
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