Accounting is a process of identifying the events of financial nature, recording them in journal, classifying in their respective ledgers, summarizing them in Profit and Loss Account and Balance Sheet and communicating the results to the users of such information. The users of accounting information include owners, creditors, bank and financial institutions, employees, government, etc.
According to the American Accounting Association
“Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.”
PROCESS OF ACCOUNTING:-
- Identification of Financial Transactions and Events – Accounting records only those transactions and events which can be measured in terms of money. This involves identifying transactions and events that are part of economic activity, for example, purchase of raw material or sale of finished goods by firm.
- Measuring the identified transactions – Financial transactions and events are measured in terms of money is not recorded in the books of account. For example, event like the caliber or quality of management team or appointment of a manager are not recorded in the books of account.
- Recording – Accounting is an art of recording business transactions in the books of account. Transactions measured in money terms, in the book of original entry, journal.
- Classifying – Classification is the process of grouping transactions or entries of one nature at one place. The transactions recorded in the ‘journal’ or the subsidiary books are classified or posted in the main book of accounts known as the Ledgers.
- Summarizing – This involves presenting the classified data in a manner which is understandable and useful for internal as well as external users of financial statements. This process leads to the preparation of Trial Balance from which: (i) Trading and Profit and Loss Account or Statement of Profit and Loss (in case of companies), and (ii) Balance Sheet is prepared.The above statements are collectively known as Final Accounts or Financial Statements.
6. Analysis and Interpretation – It includes an assessment of the financial report and making some meaningful conclusion.
7. Communicating – Accounting function involves communicating the financial information, Financial Statement, to its users. The accounting information should be provided in time to the users so that appropriate decisions may be taken at the appropriate time.
OBJECTIVES OF ACCOUNTING:-
- Maintaining Accounting Records – The objective of accounting is to record financial transactions and events of the organization in the books of account in a systematic manner following the principle of accountancy.
- Determining Profit or Loss – Another objective of accounting is to determine whether during the accounting period, the firm has earned profit or has incurred loss. For this purpose, a statement called as Income Statement or the Trading and Profit and Loss Account is prepared.
- Determining Financial Position – Another objective of accounting is to determine financial position. It is known from the Balance Sheet, Which shows value of the assets on one side and liabilities on the other side. Financial position of the business is a relevant for the users of financial statements as is the income statements, Profit and Loss Account.
- Facilitating Management – The Management often required financial information for decision-making, effective control, budgeting and forecasting. Accounting provides financial information to assist the management in discharging this function.
- Providing Accounting Information To Users – Yet another objective of accounting is to provide accounting information to users, both internal and external, who analyze them according to their requirements.
- Protecting Business Assets – Another objective of accounting maintains record of assets owned by the business which enables the management to exercise control and protect them.
FUNCTIONS OF ACCOUNTING:-
- Maintaining Systematic Accounting Records – The primary function of accounting is to maintain systematic accounting records of financial transactions and events.
- Preparation of Financial Statements or Final Accounts – Financial statements is prepared at the end of the accounting period and includes income statement (Profit and Loss Account) and position statement (Balance Sheet). Financial statements show the financial performance profit earned or loss incurred during the accounting year and the financial position, Balance sheet.
- Meeting Legal Requirements – Accounting records are accepted as evidence by the court of law if they are maintained systematically following the accounting principle and concepts.
- Communicating the Financial Information – Another function of accounting to communicate the financial information to the users, which may be internal users or external users, such as management, banks, employees, government authorities, etc?
- Assistance to Management – Management often requires financial information which is given by the accounting records which in turn helps the management in decision-making.
ADVANTAGES OF ACCOUNTING:–
- Financial information about Business – Financial performance during the accounting period, profit earned or loss incurred and also the financial position at the end of the accounting period is known from accounting.
- Replaces Memory – A systematic and timely recording of transactions obviates the necessity to remember transactions. The accounting record provides the necessary information.
- Facilitates Settlement of Tax Liabilities – A systematic accounting record immensely helps in settlement of income tax and Goods and Services Tax (GST) Liabilities, since it is a good evidence of the correct recording of transaction.
- Facilitates Loans – Loans is granted by the banks and financial institutions on the basis of growth potential which is supported by the performance and security of loan. Accounting makes available the information with respect to performance and also assets that are available as security.
- Evidence in Court – Systematic record of transaction is often accepted by the courts as good evidence.
- Facilitates Sale of Business – If someone desires to sell his business, the accounts maintained by him will enable the ascertainment of the proper purchase price.
- Assistance in the Event of Insolvency – Insolvency proceedings involve explaining many transactions that have taken place in the past. Systematic accounting records assist a great deal in such situation.
LIMITATIONS OF ACCOUNTING:-
- Accounting is not fully exact.
- Accounting does not indicate the Reliable Value.
- Accounting ignores the Qualitative Elements.
- Accounting Ignore Effect of Price Level Changes.
- Accounting may lead to Window Dressing.
- Unrealistic Information.
- Recommendation of alternative methods.
- Accounting never shows the market value so assets or business
BOOK KEEPING
Bookkeeping is stated as the recording of day to day business transaction in the books of account it involves identification of transactions of financial nature, recording them in the books of account and classifying them into ledger account.
“Book Keeping is the science and art of recording correctly in the books of account all those business transaction that result in the transfer of money’s worth.”- R.N. Carter
ACCOUNTING
Accounting is a process of identifying the events of financial nature, recording them in journal, classifying in their respective ledgers, summarizing them in Profit and Loss Account and Balance Sheet and communicating the results to the users of such information. The users of accounting information include owners, creditors, bank and financial institutions, employees, government, etc.
ACCOUNTANCY
Accountancy is a systematic knowledge of accounting. It explains how to deal with various aspect of accounting. It educates us how to maintain the books of account and how to summaries the accounting information and communicate it to the users
BRANCHES OF ACCOUNTING:-
- Financial accounting – Financial accounting is confined to recording of financial transaction, events, summarizing and interpreting them & in the end communicating them to the interested parties. Its role is confined to preparation of financial statements Profit/Loss Account and Balance Sheets.
- Cost Accounting – This branch of accounting is concerned with the ascertainment of cost of the manufactured products or services rendered and helps the management in Decision making & exercising control.
- Management Accounting – Management accounting is that branch of accounting which is concerned with preparation of management reports and accounts that give accurate and timely financial and statistical information required by manager to make day-to-day and short-term decisions.
Accounting Information
As an information system, accounting collects financial data, records it in the books of account, classifies and summarizes it to produce financial information that is communicated to its users. Accounting begins with the identification of transactions of financial nature and ends with the preparation of financial statements (Income Statement and Balance Sheet). Each step in the process of accounting generates information. Generation of information is not an end in itself; it is a way to facilitate the communication of information to users of accounting information.
According to Accounting Principles Board
“Accounting is a services activity. Its function is to provide qualitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”
Types of Accounting Information
- Information relating to Profit or Surplus – The income statement makes available the accounting information about the profit earned or loss incurred as a result of business operations or otherwise during an accounting period.
- Information Relating to Financial position – The position Statement, the Balance Sheet makes available the information about the financial position of the entity. The position statement provides information about the assets owned by the entity, amounts receivable and the cash and bank balance held by it.
- Information about Cash Flow – Cash Flow Statement is a statement that shows flow, both inflow and outflow, of cash during a specific period. It is of immense use as many decisions such as payment of liabilities payment of dividend and expansion of business, etc., are based on availability of cash.
Attribute of Accounting Information
- Reliability – Accounting information must be reliable. Reliability of information means it is verifiable, free from bias and material error.
- Relevance – Accounting Information must be relevant to the user. Information is relevant if it meets the needs of the users in decision- making.
- Understandability – understandability means that the information provided through the financial statement must be presented in a manner that the users are able to understand it.
- Comparability – Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other periods, known as intra-firm comparison or with the accounting information of other enterprises, known as inter-firm comparison.
Uses of Accounting Information
Internal users:-
- Owners
- Management
External Users:-
- Employees and Workers
- Banks and Financial Institutions
- Investors and potential Investors
- Creditors
- Government and Its Authorities
- Public
- Researchers
Systems of accounting
- Double entry system Single entry system
1.Double entry system
Double entry system is the system of accounting which recognises and records both aspect assets – Debit and Credit of a financial transaction .at the time of recording transaction one aspect is recorded in debit side and other recorded credit side. for example when goods are purchase in cash ,goods are acquired and in return cash is paid.in this transaction is two aspect is involved one receiving goods and other is paying cash .
2.Single entry system
Single entry system which is also known as accounts of incomplete records of recording transaction in the books of accounts may be defined as an incomplete double entry system.in this system all transactions are not recorded on double entry basis. In some transaction both aspect of the transaction are recorded, while in others either one aspect is recorded or not recorded at all.