1|Pa g e

Introduction of Accounting
Accounting is the process of recording financial transactions pertaining to a business. The
accounting process includes summarizing, analyzing, and reporting these transactions to
oversight agencies, regulators, and tax collection entities. The financial statements used in
accounting are a concise summary of financial transactions over an accounting period,
summarizing a company's operations, financial position, and cash flows.

What Is the Purpose of Accounting?

Accounting is one of the key functions of almost any business. A bookkeeper or an accountant
may handle it at a small firm. At larger companies, there might be sizable finance departments
guided by a unified accounting manual with dozens of employees. The reports generated by
various streams of accounting, such as cost accounting and managerial accounting, are invaluable
in helping management make informed business decisions.

The financial statements that summarize a large company's operations, financial position, and
cash flows over a particular period are concise and consolidated reports based on thousands of
individual financial transactions. As a result, all professional accounting designations are the
culmination of years of study and rigorous examinations combined with a minimum number of
years of practical accounting experience.

What Are the Different Types of Accounting?

Accountants may be tasked with recording specific transactions or working with specific sets of
information. For this reason, there are several broad groups that most accountants can be grouped
into.

Financial Accounting

Financial accounting refers to the processes used to generate interim and annual financial
statements. The results of all financial transactions that occur during an accounting period are
summarized in the balance sheet, income statement, and cash flow statement. The financial
statements of most companies are audited annually by an external CPA firm.

For some, such as publicly-traded companies, audits are a legal requirement. However, lenders
also typically require the results of an external audit annually as part of their debt covenants.
Therefore, most companies will have annual audits for one reason or another.

Managerial Accounting
Managerial accounting uses much of the same data as financial accounting, but it organizes and
utilizes information in different ways. Namely, in managerial accounting, an accountant generates
monthly or quarterly reports that a business's management team can use to make decisions about
how the business operates. Managerial accounting also encompasses many other facets of

AAL – Final AC and Ethics KT Prabhashwara - 0756553456

2|Pa g e

accounting, including budgeting, forecasting, and various financial analysis tools. Essentially,
any information that may be useful to management falls underneath this umbrella.

Cost Accounting
Just as managerial accounting helps businesses make decisions about management, cost
accounting helps businesses make decisions about costing. Essentially, cost accounting considers
all of the costs related to producing a product. Analysts, managers, business owners, and
accountants use this information to determine what their products should cost. In cost accounting,
money is cast as an economic factor in production, whereas in financial accounting, money is
considered to be a measure of a company's economic performance .

Tax Accounting
While financial accountants often use one set of rules to report the financial position of a
company, tax accountants often use a different set of rules. These rules are set at the federal, state,
or local level based on what return is being filed. Tax accounts balance compliance with reporting
rules while also attempting to minimize a company's tax liability through thoughtful strategic
decision-making. A tax accountant often oversees the entire tax process of a company: the
strategic creation of the organization chart, the operations, the compliance, the reporting, and the
remittance of tax liability.

What Is the Accounting Cycle?

Financial accountants typically operate in a cyclical environment with the same steps happening
in order and repeating every reporting period. These steps are often referred to as the accounting
cycle, the process of taking raw transaction information, entering it into an accounting system,
and running relevant and accurate financial reports. The steps of the accounting cycle are:

1. Collect transaction information such as invoices, bank statements, receipts, payment

requests, uncashed checks, credit card statements, or other mediums that may contain
business transactions.
2. Post journal entries to the general ledger for the items in Step 1, reconciling to external
documents whenever possible.
3. Prepare an unadjusted trial balance to ensure all debits and credits balance and material
general ledger accounts look correct.
4. Post adjusting journal entries at the end of the period to reflect any changes to be made to
the trial balance run in Step 3.
5. Prepare the adjusted trial balance to ensure these financial balances are materially correct
and reasonable.
6. Prepare the financial statements to summarize all transactions for a given reporting period.

AAL – Final AC and Ethics KT Prabhashwara - 0756553456

3|Pa g e

Cash Method vs. Accrual Method of Accounting

Financial accounts have two different sets of rules they can choose to follow. The first, the accrual
basis method of accounting, has been discussed above. These rules are outlined by LKAS and
SLFRS, are required by public companies, and are mainly used by larger companies.

The second set of rules follow the cash basis method of accounting. Instead of recording a
transaction when it occurs, the cash method stipulates a transaction should be recorded only when
cash has exchanged. Because of the simplified manner of accounting, the cash method is often
used by small businesses or entities that are not required to use the accrual method of accounting.

The difference between these two accounting methods is the treatment of accruals. Naturally,
under the accrual method of accounting, accruals are required. Under the cash method, accruals
are not required and not recorded.

What Is Double Entry?

Double entry is a bookkeeping and accounting method, which states that every financial
transaction has equal and opposite effects in at least two different accounts. It is used to satisfy
the accounting equation:

Assets=Liabilities + Equity

With a double-entry system, credits are offset by debits in a general ledger or T-account.

In accounting, a credit is an entry that increases a liability account or decreases an asset account.
A debit is the opposite. It is an entry that increases an asset account or decreases a liability
account. In the double-entry accounting system, transactions are recorded in terms
of debits and credits. Since a debit in one account offsets a credit in another, the sum of all debits
must equal the sum of all credits.

The double-entry system of bookkeeping standardizes the accounting process and improves the
accuracy of prepared financial statements, allowing for improved detection of errors. All types of
business accounts are recorded as either a debit or a credit.

Under the systematic process of accounting, these interactions are generally classified into
accounts. There are five different types of accounts that all business transactions can be classified:

• Assets
• Liabilities
• Equities
• Revenue or income

AAL – Final AC and Ethics KT Prabhashwara - 0756553456

4|Pa g e

• Expense

Then let’s see how we account these 5 according to the double entry theory.

1. වත්කම් ගිනුම් (Assets)

Dr Cr
(increment) (decrement)

2. වගකීම් ගිනුම් (Liabilities)

Dr Cr
(decrement) (increment)

3. හිමිකම් ගිනුම් (Equity)

Dr Cr
(Decrement) (Increment)

AAL – Final AC and Ethics KT Prabhashwara - 0756553456

5|Pa g e

4. ආදායම් ගිනුම් (Income)

Dr Cr
(Decrement) (Increment)

5. වියදම් ගිනුම් (Expenses)

Dr Cr
(Increment) (Decrement)

AAL – Final AC and Ethics KT Prabhashwara - 0756553456