Meaning of Accounting: According to AICPA Accounting is 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. Scope of Accounting, Functions of Accounting, Type of Accounting, Used of Accounting, Limitation of accounting.
Meaning of Accounting, Scope of Accounting
From the above, we can conclude that accounting refers to:
- a procedure of writing financial transactions and events.
- a system of recording, classifying, summarizing, analyzing, interpreting & reporting periodically, in terms of money, which provides necessary financial information.
Accounting accumulates data systematically and supplies the necessary information to the users of financial statements with the help of which the users can take proper economic decisions and also may make proper predictions.
Accountancy is a broader and more flexible concept and requires more understanding than book keeping, which includes merely the process of recording of transactions; whereas accountancy includes further activities like classifying, summarizing, analyzing, interpreting & reporting. Accounting reports give more information than book keeping records.
Branches of Accounting
Accounting has basically three branches:
- It is concerned with the maintenance of Books of Accounts of an enterprise,
- recording & classifying all its financial transactions & events with a view to prepare Annual Financial Accounts
- which can be used by various stakeholders. (i.e. General Purpose Financial Statement)
- It refers to use of accounting data with Proper analysis in reporting, so as to serve the need of management.
- To help them in decision making & exercising proper controls.
- Generally manufacturing concerns maintains cost accounts
- with a view to ascertain the cost of goods manufactured or services rendered with proper break-up of cost &
- also providing useful data to management for effective cost control.
Must Read – Basic Principles and Golden Rules of Accounting
Need and Use of Accounting:
- In order to solve the day-to-day financial & operational problems, it becomes necessary to have knowledge about the past and present economic events.
- Accounting is developed out of the need for communicating necessary information about the events.
- Maintenance of accounts would become unnecessary if a decision maker could remember and observe all the relevant financial events personally.
- This is not possible due to the following facts:
- since it is not possible for a human being to remember all the events which occurred at different places & different times.
- all attributes of an event are not equally useful and important to the users.
- In a Medium & Large size organisation, decision maker will himself not handle all the financial transactions & events personally & hence there’s no question of remembering.
Basic care to be taken in maintenance of Accounts to make it useful:
- The events are to be recorded in such a manner as they could easily be comprehended and,
- at the same time, such records may also be used as evidences of the events in future.
- In order to avoid ambiguity of the recorded evidences, a clear-cut explanation becomes necessary.
Must Read – Accounting Concepts & Conventions
Limitation of accounting:
- Accounting is not an exact science.
- It is based on many assumptions & conventions.
- It involves many estimation which results in to subjectiveness.
- There are different alternatives possible for the same item which gives scope for manipulation to get desired result.
- It cannot record the effect of many important events which cannot be measured in terms of money like value of human resources which an enterprise has.
- It does not consider the effect of inflation on income, expense, assets & liabilities.
Functions of accounting data:
Accounting data serves the following functions:
- Measurement: Account data helps to measure the performance & financial position of the enterprise. It measures Assets, liabilities, Expenses & Incomes.
- Forecasting: On the basis of past accounting data, forecasting about future plans are made.
- Decision Making: Various decisions requires timely & correct information which is provided by accounts.
- Evaluations: Evaluation of an enterprise’s performance & financial health is done from accounting data.
- Control: By adopting various accounting techniques, checks & balances the activity of the enterprise is controlled.
(vi) Govt. regulation & Taxation: Accounting data serves the various requirements of govt. regulations & to assess proper tax liability.
Must Read – Sub Fields of Accounting
The users of financial statement & their information needs:
|Sr. No.||Users||Their information needs|
|1||Investors (providers of risk capital and their advisors) – existing & potential||Information to determine whether they should buy, hold or sell, the shares of the company. The owners of proprietary/ partnership concerns want to assess performance & financial health, to decide the continuance of such unit.|
|2||Managers/ Directors||Information to make decisions which have a bearing on the performance of the enterprise so as to ensure proper return on capital employed.|
|3||Employees (Employees and their representative groups i.e. unions)||Information that enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.
To assess their Bonus & other claims.
|4||Lenders||Information that enables them to determine whether their loans and the interest thereon, will be paid when due.|
|5||Suppliers and other trade creditors||Information that enables them to determine whether the amounts owing to them will be paid when due.|
|6||Customers||Information about the continuance of an enterprise especially when they have a long-term involvement with, or are dependent on the enterprise.|
|7||Government and their agencies||Information to regulate the activities of enterprises, to determine taxation policies and as the basis of national income and similar statistics.|
|8||Public||Information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.|
|9||Competitors||Information of strategic nature to assess their relative strengths and weaknesses and for comparison and benchmarking purposes.|
Qualitative characteristics of financial statements:
- Qualitative Characteristics are the attributes (features) that makes the information provided by financial statement useful to the users.
- Qualitative Characteristics are as follows:
Understandability: The information should be readily understandable to those who have reasonable knowledge of business & economic activity.
Relevance: Information has relevance when it influences the user’s decision making. Nature of information & materiality will be considered to decide relevance.
Comparability: It should be comparable with its own past data & also with other similar enterprises.
Must Read – What is Book Keeping
Role of Accounting in the Society
- An accountant with his education, training, analytical mind and experience is best qualified to provide multiple need-based service to the ever-growing society.
- The services rendered by accountants to the society include the following:
- To maintain the Books of Accounts in a systematic manner.
- To act as a Statutory Auditor (for example under the Companies Act, Income Tax Act, Co-operative Societies Act)
- To act as an Internal Auditor.
- To act as Social Auditor.
- To act as Taxation Advisor.
- To act as Management Accountant.
- To act as Financial Advisor
- To provide Management Consultancy Services.
- To act as Company Law Advisor.
- To act as Liquidator.
- To act as Arbitrator.
- To act as Management Information System Consultant.
- To act in the field of software development.
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RELATIONSHIP OF ACCOUNTING WITH OTHERS:
Relationship of Accounting with other Disciplines like:
- i) Economics ii) Statistics iii) Mathematics iv) Law v) Management
Accounting and Economics:
- Economics is viewed as a science of rational decision making about the use of scarce resources.
- It is concerned with the analysis of efficient use of scarce resources for satisfying human wants.
- Accounting overlaps economics in many respects and contributes a lot in improving the management decision making process.
- Accountants developed the valuation, measurement and decision making techniques which may owe to the economic theorems for origin but these are molded in the work environment and suitably tempered with reference to relevance, variability, freedom from bias, timeliness, comparability, reliability and understandability.
- At the macro-level, accounting provides the data base over which the economic decision models have been developed; micro-level data arranged by the accounting system is summed up to get macro-level data base.
Accounting and Statistics:
- The use of statistics in accounting can be appreciated better in the context of the nature of accounting records.
- But such precision is not essential for making business decisions and hence statistical approximations are sought.
- In accounts all values are important individually because they relate to business transactions.
- As against this, statistics is concerned with the typical value, behaviour or trend over a period of time or the degree of variation over a series of observations.
- Statistical methods are helpful in developing accounting data and in their interpretation & are useful even in valuation.
- Therefore, the study and application of statistical methods would add extra edge to the accounting data.
Accounting and Mathematics:
- Knowledge of arithmetic and algebra is a pre-requisite for accounting computation and measurements.
- The fundamental dual aspect concept of accounting is expressed in the form of a mathematical equation, popularly known as ‘accounting equation’.
- With the advent of the computer, mathematics is becoming a vital part of accounting.
- The use of the technique of operations research has made accounting all the more mathematical.
- Graphs and charts are being extensively used for communicating accounting information.
Accounting and law:
- An economic entity operates within a legal environment.
- Every country has set of economic, fiscal and labour laws.
- All transactions with suppliers and customers are governed by the Contract Act, the Sale of Goods Act, the Negotiable Instruments Act, etc.
- Very often the accounting system to be followed is prescribed by law.
- A legislation about accounting system cannot be enacted unless there is a corresponding development in the accounting discipline.
- In that way accounting influences law and is also influenced by law.
Accounting and Management:
- Management is broad occupational field which comprises many functions and encompasses application of many disciplines including those mentioned above.
- ‘Management accounting’ processes accounting data for management decision making.
- This indicates the linkage between management and accounting.
- Accounting is an essential service function of management.