Accounting is the process of identifying, measuring, recording and communicating the economic events of the organization to interested users of the information.
Definitions
1. “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 or least, of financial character, and interpreting the results thereof”—American Institute of Certified Public Accounts.
2. “Nearly every business enterprise has accounting system. It is a means of collecting, summarising, analysing and reporting in monetary terms, informations about business.” R.N. Anthony.
Characteristics of Accounting
Identifying Economic Events : Accounting is related with those transactions and events which are of financial nature and can be measured in terms of money.
Recording : After identifying and measuring economic events of financial nature, they are recorded in a systematic manner in journal.
Classifying : It is an art to group transactions of same nature at one place by opening ledger accounts.
Summarising : Summarising is the art of presenting the classified data in a manner which is understandable and useful to the management and other users of the data.
Analysing : Analysis provides useful information from statements. It helps the management to judge the performance of business operations and utilize for future plans.
Interpretation : The information thus obtained is interpreted by the management, investors, creditors, stock-exchange and tax-authorities. Such interpretations help all the interested parties in taking prompt decisions.
Functions of Accounting
Maintenance of Records of Business : The main objective of accounting is to keep complete record of business transactions according to specified rules. Complete record of business transactions help to avoid the possibility of omissions and fraud.
Calculation of Profit and Loss : To ascertain the profit or loss incurred during the year, Trading and Profit and Loss Account is prepared at the end of the year.
Depiction of Financial Position: A balance sheet depicts the financial position of an enterprise. It is a statement of assets and liabilities. The balance of the assets and liabilities shows the capital of the business.
Comparative Study : A systematic record is helpful to compare the results with previous year regarding profits, losses, sales, expenses, etc.
Taxation : Properly maintained accounts are helpful for assessment of sales tax and income tax.
Evidence in Court : Properly maintained accounts are helpful as evidence of proof in the court of law.
Sale of Business : In case of sale of business, properly maintained accounts are very helpful both for the buyer and the seller.
Helps Management in Taking Decisions : It helps management to plan, take decisions and control the business activities efficiently.
Advantages of Accounting
Sale of Business : Properly maintained accounts are helpful in calculating the net worth of the business at the time of sale of business.
Progress and Performance : It gives information about the progress and performance of the business enterprise.
Helpful for Memory : Business transactions are numerous. It is impossible to memorise each and every transaction. A complete record in writing is very helpful.
Financial Position : Financial position of the enterprise can be determined easily through balance sheet of the business.
Comparative Study : A properly maintained record is helpful to make a comparative study of the results of the current year with the previous year regarding profits, turnover and expenses.
Documentary Evidence : Properly maintained accounts books can be used as an evidence in the court of law.
Detecting Frauds : Properly maintained accounts are helpful for internal checkup and prevents mis-appropriation of funds and frauds.
Limitations of Accounting
Valueless Assets : There are a number of assets which do not have real value but they are shown in balance sheet, such as patents, goodwill etc.
Instability of Money : Value of money is under constant changes due to inflation, but it is shown in the books of accounts.
Record of Monetary Transactions only : Accounting keeps records of financial transactions which are measured in terms of money and ignore non-financial nature of transaction such as competency of management, competitions and government policies.
Manipulation : On account of various methods of valuation of depreciation, stock, assets, liabilities & profits can be manipulated.
No Consideration of Present Value of Assets : Sometimes the balance sheet does not show the present value of a few assets as purchased 15 years back for Rs. 15,000 may be worth Rs. 8 Lakhs but shown at original price i.e. Rs. 15,000.
Branches of Accounting
Financial Accounting : The main objective of this branch of accounting is to record the transactions of the enterprise in a systematic manner, to calculate the profit or loss of the accounting period by preparing profit and loss account and to present the financial position of the business by preparing a balance sheet.
Cost Accounting : It deals with the cost of production and includes the estimation of cost of various business activities. It is a systematic process of determining unit cost at different levels of production.
Management Accounting : It deals with the decision making and efficient running of an enterprise. It contains the supply of significant and useful information to the management for decision and making policy.
Tax Accounting : This branch of accounting is used for tax purposes. Income tax and Sales Tax are computed on the basis of this accounting.
Budget Accounting : It deals with the preparation of budget for the coming financial year as well as comparison with the current budget of the actual performances.
The difference
Book Keeping : The maintenance of books of accounts includes the following functions :
(a) Identifying the transactions of financial nature.
(b) Measuring the identified transactions in terms of money.
(c) Recording these transactions in the books of original entry.
(d) Classifying them into ledger.
Accounting : It includes the following activities :
(a) Summarising the classified transactions in the form of profit and loss account and balance sheet, etc.
(b) Analysing and Interpreting the summarised results.
(c) Communicating the information to the interested parties.
Accounting : It refers to a systematic knowledge of accounting concerned with the principles and techniques which are applied in accounting. It tells us how to prepare books of accounts, how to summarize the accounting information and how to communicate it to the interested parties.
Accounting as a science and an art
Science : Accounting is both a science and art. It is a science because records of business transactions are kept in a systematic way and based on some fundamental principles.
Art : It is an art because business transactions are recorded on double entry basis in an organised way. It includes the study of accounting principles in real situations as required in modern set up.
Both : Thus, it is both science and art.
Users of accounting information
Accounting information is used by the following:
Investors : Investors need accounting information about the profitability and financial position of the business.
Creditors : They are the persons who have sold goods to business on credit. They need information to determine whether the amount owing to them will be paid when due. They can ascertain it by studying the balance sheet of the enterprise.
Management : Management needs a lot of information for the efficient running of the business, such as increase or decrease in sales, speed of increase in the cost production, etc. It is required in addition to profitability and soundness of business.
Owners : They want to know about the profitability and financial soundness of the business. They also want to know whether profits are increasing or decreasing. What are the causes of increase or decrease in profits? What is the value of fixed assets and floating assets of the business?
Employees : Employees are interested in proper running of business for wages and bonus.
Tax Authorities : Tax authorities need accounting records to assess the taxes rightly.
Lenders : Lenders are interested in good running of business so that loans and interest are paid regularly.
Researchers : Researches are interested in using the accounting information for any objective and growth of business.
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