Accounting

An overview of Accounting
Prashant singh
Cimage Professional College
(patna)
Structure
 Introduction
 Accounting--- An Overview
 Objectives of Accounting
 Definition and Scope of Accounting
 Book-keeping, Accounting and Accountancy
 Parties Interested in Accounting Information
 Branches of Accounting
 Advantages of Accounting
 Limitations of Accounting
Objective of Accounting
1. To maintain systematic records.
2. To ascertain net profit or net loss of the business.
3. To ascertain the financial position of the
business.
4. To provide accounting information to interested
parties.
Definition of Accounting
 The subject of accounting has been defined in different ways by
different authorities.
 According to the Accounting Association “Accounting is the
process of identifying, measuring, and communicating economic
information to permit informed judgements and decisions by
users of the information”.
 In the words of the committee on terminology, appointed by the
American Institute of Certified Public Accountants, “ Accounting
is the art of recording, classifying and summarising in a
significant manner and in terms of money, transactions and
events which are in part atleast, of a financial character and
interpreting the results thereof.
Scope of Accounting
1. Accounting is concerned with the transactions
and events which are of financial character.
2. Having identified the transactions, they should
be measured or expressed in terms of money, if
not expressed already.
3. The transactions which are identified and
measured are to be recorded in a book called
‘journal’ or in one of its sub-divisions.
Cont’d
4. The recorded transactions have to be classified
with a view to group transactions of similar
nature at one place. This is done in a separate
book called ‘ledger’.
5. The transactions which are recorded and
classified will result in a mass of financial data.
It is therefore necessary to summarise such data
periodically in a significant and meaningful
form.
Cont’d
 The summarised results have to be analysed and
interpreted with the help of statistical tools like
ratios, averages etc., and examined critically. Later
on , this data will be communicated in t form of
reports to the interested parties.
Book-keeping, Accounting and
Accountancy
 According to G.A. Lee, the accounting system has
following two stages:
1) The making of routine records, in prescribed form
and according to set rules, of events which affect the
financial state of the organisation; and
2) The summarisation from time to time of the
information contained in the records, its presentation
in a significant form to interested parties, and
interpretation as an aid to decision making by these
parties.
Cont’d
 Stage (1) is called Book-keeping and stage (2) is
called Accounting.
 Book-keeping is thus a narrow term concerned
mainly with the maintenance of the books of
account and covers the first four activities listed
in the scope of accounting viz., identifying the
transactions and events to be recorded, measuring
them in terms of money, recording them in the
book of prime entry, posting them into ledger.
Cont’d
 Accounting on the other hand, is concerned with
summarising the recorded data, interpreting the
financial results and communicating them to all
interested parties.
 In other words, accounting starts where book-
keeping ends.
Cont’d
 The term ‘Accountancy’ refers to a systematised knowledge of
accounting and is regarded as an academic subjects like
economics , statistics, etc.
 It explains ‘why to do’ and ‘how to do’ of various aspects of
accounting.
 In other words , while Accounting refers to the actual process of
preparing and presenting the accounts, Accountancy tells us why
and how to prepare the books of account and how to summarise the
accounting information and communicate it to the interested parties.
 Thus, Accountancy is a science( a body of systematised knowledge)
whereas Accounting is the art of putting such knowledge into
practice.
Parties Interested In Accounting
Information
 Owners: Owners contribute capital and assume the
risk of business.
 Managers: Accounting information is of immense
use to mangers.
 Lenders: Initially the funds are provided by the
owners. But , when the business requires more
funds, they are usually provided funds by the
banks and other lenders of money.
Cont’d
 Creditors: Those who supply goods and services on
credit are called creditors.
 Prospective Investors: A person who wants to become
a partner in a firm or a person who wants to become a
shareholder of a company, would like to know how
safe and rewarding the proposed investment would
be.
 Tax Authorities: Tax authorities of the government are
interested in the financial statements so as to assess
the tax liability of the enterprise.
Cont’d
 Employees: The employees of the enterprise are
also interested in knowing the state of affairs of
the organisation in which they are working , so as
to know how safe their interests are in that
organisation.
Branches of Accounting
1. Financial Accounting: The purpose of this branch of
accounting is to keep a record of all financial
transactions so that
a. The profit earned or loss incurred by the business
during an accounting period can be worked out,
b. The financial position of the business as at the end of
the accounting period can be ascertained, and
c. The financial information required by the
management and other interested parties can be
provided.
Cont’d
2. Cost accounting: The purpose of cost accounting
is to analyse the expenditure so as to ascertain
the cost of various products manufactured by the
firm and fix the prices. It also helps in controlling
the costs and providing necessary costing
information to management for decision making.
Cont’d
3. Management Accounting: The purpose of
management accounting is to assist the
management in taking rational policy decisions
and evaluate the impact of its decisions and
actions.
 Examples of such decision are : pricing decisions,
make or buy decisions, capital expenditure
decisions, etc.
Advantages of Accounting
1. Replaces memory
2. Provides control over assets
3. Facilitates the preparation of financial
statements
4. Meets the information requirements
5. Facilitates a comparative study
6. Assists the management in many other ways
Cont’d
7. Difficult to conceal fraud or theft
8. Tax matters: Properly maintained accounting
records will help in settlement of all tax matters
with the tax authorities.
9. Ascertaining value of business
10. Acts as a reliable evidence
Limitations of Accounting
1. They do not record transactions and events which
are not of a financial character. Hence , they do
not reveal a complete picture because facts like
quality of human resources, licenses possessed,
location advantage, business contacts, etc. do not
find any place in books of account.
Cont’d
2. The data is historical in nature. The accountants
adopt historical cost as the basis in valuing and
reporting all assets liabilities. They do not reflect
current values. It is quite possible that items like
land and buildings may have much more value
than what is stated in the balance sheet.
Cont’d
3. Facts recorded in financial statements are greatly
influenced by accounting conventions and
personal judgements. Hence, the do not reveal
the true picture. In many cases, estimates may be
used to determine the value of various items.
4. Data provided in the financial statements is
insufficient for proper analysis and decision
making. It only provides information about the
overall profitability of the business.