Lesson 1 Introduction Of Accounting

Meaning of Accounting

“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 financial character and interpreting the result thereof.

Relevant aspects of the definition of accounting

1. Economic events
2. Identification, measurement, recording, and communication
3. Organization
4. The interested user of information

1. Economic Events: An economic event is known as a happening of consequence to a business organization which consists of transactions and which are measurable in monetary terms.

2. Identification, measurement, recording, and communication:

1. Identification: It means determining what transactions to record i.e. to identify events that are to be recorded.

2. Measurement: It means quantification (including estimates) of business transactions into financial terms by using monetary units.

3. Recording: Once the economic event is identified and measured in financial terms, these are recorded in books of accounts in monetary terms and in chronological order.

4. Communication: The economic events are identified, measured, and recorded in order that the pertinent information is generated and communicated in a certain form to
management and other internal and external users.

3. Organisation: It refers to a business enterprise, whether for profit or not-for-profit motive.

4. Interested user of information: Accounting is a means by which necessary financial information about business enterprise is communicated and is also called the language of business. Many users need financial information in order to make important decisions.

Users	Classification	Information the user want
Internal	1. Owner	Return on their investment, financial health of their company/business.
	2. Management	To evaluate the performance to take various decisions.
External	1. Investors and potential investors	Safety and growth of their investments, future of the business.
	2. Creditors	Assessing the financial capability, ability of the business to pay its debts.
	3. Lenders	Repaying capacity, credit worthiness.
	4. Tax Authorities	Assessment of due taxes, true and fair disclosure of accounting information.
	5. Employees	Profitability to claim higher wages and bonus, whether their dues (PF, ESI, etc.) deposited regularly.
	6. Others	Customers, Researchers etc., may seek different in-formation for different reasons.

Accounting as a source of information: Accounting is a service activity. Its function is to provide qualitative information primarily financial in nature, about economic entities that are intended to be useful in making economic decisions.

Branches of Accounting
1. Financial Accounting: It assists in keeping a systematic record of financial transactions, the preparation, and presentation of financial reports in order to arrive at a measure of organizational success and financial soundness.

2. Cost Accounting: It assists in analyzing the expenditure for ascertaining the cost of various products manufactured or services provided by the firm and fixation of prices thereof.

3. Management Accounting: It deals with the provisions of necessary accounting information to people within the organization to enable them in decision-making, planning, and controlling business operations.

Qualitative Characteristics of Accounting Information:
1. Reliability: An accounting information should be objective and reliable. To be reliable, it should be free from errors and bias and should represent what it should represent.

2. Relevance: An accounting information should be relevant for decision making. To be relevant, information must be made available in time and help in prediction and feedback.

3. Understandability: An accounting information should be readily understandable by its user. It should be presented in simple terms and form.

4. Comparability: An accounting information will be useful and • beneficial to the different users only when it is comparable over time and with other enterprises. For this, there should be consistency, i.e. use of the common unit of measurement, common format of reporting, and common accounting policies.

Objectives of Accounting

1. To keep systematic records of the business.
2. To ascertain the financial results, i.e. profit or loss of the firm during a particular period.
3. To show the financial position of the firm by preparing a position statement on a particular date.
4. To communicate the accounting information to its users.

Role of Accounting: An accountant with his education training, analytical mind, and experience are best qualified to provide multiple need-based services to the end growing society. The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial layout, company legislation, and procedures but they can act in the fields relating to financial policies, budgetary policies, and even economic principles.

The service recorded by accountants to the society include the following:
(a) To maintain the Books of Account in a systematic manner.
(b) To act as a Statutory Auditor.
(c) To act as an Internal Auditor.
(d) To act as a Taxation Advisor.
(e) To act as a Financial Advisor. ,
(f) To act as a Management information system consultant.

Distinguish between book-keeping, accounting, and accountancy.

Bookkeeping is the activity of recording the financial transactions of the company in a systematic manner while Accounting is an orderly recording and reporting of the financial affairs of an organization for a particular period while accountancy is to summarize, classify and accordance of every financial activity into a system. Book-keeping is a primary and basic function in the process of accounting and concerned with recording and maintenance of books of accounts only. Accounting is the secondary function, and it starts where function of book-keeping ends. Accountancy is a study of systematic knowledge and contains those rules, regulations, procedures, principles, concepts, conventions and techniques, which are to be applied in the process of accounting. In this sense, we can say that accountancy is a broader term that acts as a guide for the preparation of books of accounts, summarisation of information and communicating the results to all the concerned parties.

Also Check: - Lesson 2 Basic Accounting Terms Important Questions

Objectives of Accounting

1. To keep systematic and complete records of financial transactions in the books of accounts according to specified principles and rules to avoid the possibility of omission and fraud.
2. To ascertain the profit earned or loss incurred during a particular accounting period which further help in knowing the financial performance of a business.
3. To ascertain the financial position of the business by the means of financial statement i.e. balance sheet which shows assets on one side and Capital & Liabilities on the other side.
4. To provide useful accounting information to users like owners, investors, creditors, banks, employees and government authorities etc who analyze them as per their requirements.
5. To provide financial information to the management which help in decision making, budgeting and forecasting.
6. To prevent frauds by maintaining regular and systematic accounting records.

Advantages of Accounting

1. It provides information which is useful to management for making economic decisions.
2. It help owners to compare one year’s results with those of other years to locate the factors which leads to changes.
3. It provide information about the financial position of the business by means of balance sheet which shows assets on one side and Capital & Liabilities on the other side.
4. It help in keeping systematic and complete records of business transactions in the books of accounts according to specified principles and rules, which is accepted by the Courts as evidence.
5. It help a firm in the assessment of its correct tax Liabilities such as income tax, sales tax, VAT, excise duty etc.
6. Properly maintained accounts help a business entity in determining its proper purchase price.

Limitations of Accounting

1. It is historical in nature; it does not reflect the current worth of a business.
   Moreover, the figures given in financial statements ignore the effects of changes in price level.
2. It contains only those informations which can be expressed in terms of money. It ignores qualitative elements such as efficiency of management, quality of staff, customers satisfactions etc.
3. It may be affected by window dressing i.e. manipulation in accounts to present a more favorable position of a business firm than its actual position.
4. It is not free from personal bias and personal judgment of the people dealing with it. For example different people have different opinions regarding life of asset for calculating depreciation, provision for doubtful debts etc.
5. It is based on various concepts and conventions which may hamper the disclosure of realistic financial position of a business firm. For example assets in balance sheet are shown at their cost and not at their market value which could be realised on their sale.

                          Important Questions 

Q.1. What are the 5 roles of accounting?

Q.2. Objectives of Accounting.

Q.3. Role of Accounting.

Q.4. Meaning of Accounting.

Q.5. Is accounting an art or a science?

Q.6. Distinguish between financial accounting, cost accounting, and management accounting.