By Asok Nadhani
Meaning and Scope of
Accounting
1.1
Concept of Transaction and Event
An individual, a group of individual or an
institution like club or a local authority body (Calcutta Municipal
Corporation), etc carries some kind of economic activities (which can be
expressed in transfer of money). These economic activities give rise to Financial
Transactions and Events. Transactions mean some type of business work,
performance of an act, an agreement. Event means an outcome or result of
transactions.
Example: A man purchased goods for Rs.20, 000 and Sold them
for Rs.25, 000, the purchase and sale of the goods are Transactions, and the
surplus of Rs.(25,000 -20,000) = Rs.5,000 is an Event.
Accounting helps us and keeps records of
all such Transactions and Events.
1.2
Development of Accounting
Lucas F. Pacioli, a
resident of Venice Italy
1.3
Accounting
i)
According to American Institute of Certified Public
Accountants, “Accounting is the Art of recording, classifying, and summarizing
in a significant manner and in terms of money, transactions and events which
are of financial character, and interpreting the results thereof”.
ii)
According to 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”.
1.3.1 Characteristics of Accounting:
(i)
Accounting is a process comprising of Recording of
transactions, Classifying, Summarizing, Analyzing, Interpreting & Communication.
(ii)
It requires transactions to be expressed in terms
of money.
(iii)
It involves recording (book keeping) as well as interpreting
the results (Reporting).
(iv)
It communicates information to interested persons.
1.3.2
Functions / Objectives of Accounting
(i)
Systematic Records: Accounting keeps record of a financial transaction in a systematic way.
(ii)
Financial
Position: The Balance Sheet reveals statement of assets and liabilities of the
business on a particular date.
(iii) Operational profit or loss: Accounting helps in ascertaining the net
profit earned or loss suffered on account of carrying the business.
(iv) Forecasting:
It helps in forecasting
the future performance on basis of current position of the business.
(v)
Decision Making: Analysis and
reporting of information, facilitates decision-making.
(vi) Communicating
the Results: It communicates the results to
interested parties like investors, creditors, employee etc.
(vii) Regulation
& Taxation: It meets the requirements
under the provision of various acts and rules, like Sales Tax Act, Income Tax
act, Excise Act etc.
1.4
Book Keeping
Book keeping is
an art of scientifically recording of all types of money transactions. It
involves tasks like:
- Recording of
transactions in original books (Journal & Subsidiary Books).
- Classifying
& posting in ledger (and other books).
1.5
Branches of Accounting
Following are
the branches of Accounting:
(i)
Book Keeping: Book keeping
deals with procedural aspects of accounting records keeping.
(ii)
Financial
Accounting: It deals with the preparation, interpretation of financial statements.
(iii) Management Accounting: It deals with the
accounting data for management decision.
(iv) Cost Accounting: It deals with the
classification, recording, allocation and summarization of cost or products
& services.
(v)
Social
Accounting: It deals with the application of accounting to socio-economic analysis
and preparation, estimation and interpretation of national and international
accounting data.
1.6 Users of Accounting Information
The financial
statements are prepared primarily to serve:
(i) Investors: To determine whether they should buy, hold or sell
and to assess the ability of the enterprise to pay dividends.
(ii) Employees: Employees and their representative groups are
interested in information to assess the stability, profitability and the
ability of the enterprise to provide remuneration, retirement benefits and
employment opportunities.
(iii) Lenders: Lenders are interested in information, to determine whether
their loans, and interest will be paid when due.
(iv) Suppliers and other trade creditors: They are interested in information to
determine whether amounts owing to them will be paid when due.
(v) Customers: Customers have an interest in information about supply
and fulfillment of their desired products & services and the continuance of
an enterprise.
(vi) Governments: Government and their agencies are interested in the
information about allocation of resources of enterprises to determine taxation
and other national policies.
(vii) Public: Organisations make contribution to the local economy
in many ways. So, the public are interested in information about trends and
recent developments of the enterprise and its activities.
1.7
Necessity of Accounting
(i)
Assistance to
Management: Accounting helps the management in planning, decision-making and
controlling the business to function properly.
(ii)
Assessing the
performance of the Business: It records all the business transactions
systematically. An income statement reveals the profit & loss of the
business.
(iii)
Assessing the
Financial Status of the Business: Balance Sheet reveals the true position of
assets and liabilities of the business at the end of the accounting year.
(iv)
Information to
Interested Groups: Owners, creditors, management, employees,
government and consumers are interested in accounting information.
(v)
Sale
(vi)
Raising Finance
from Market: To get financial aid, like bank loan, loan from market and other
institutions etc, proper accounting is necessary.
(vii)
Comparative
Study: It helps in comparisons between the current year and previous years of
the company and with other companies in similar trade.
(viii)
Taxation
Matters: Tax authorities need to verify accounting records.
(ix)
Evidence in
Court: In the court, to substantiate claim of the business, accounting records
are needed as evidence.
(x)
Licensing-Export/
Import: To get license for trade, manufacture, export & import, accounting
records must be maintained.
1.8 Role of Accountant
The following are various areas where role of accounts in important.
i)
Maintenance of Books of Accounts.
ii)
Comparative Study.
iii)
Evidence in court.
iv)
Helps insolvent person in proving insolvency.
v)
Sale
vi)
Statement of Taxation Liability.
vii)
Statutory audit.
viii)
Internal audit.
ix)
Management Accounting.
x)
Guidance of Taxations to reduce burden of Tax.
xi)
Financial Advice.
xii)
Investigations in problem area like fall of profit,
fraud detection etc.
xiii)
Management Consultancy services.
1.9 System of Accounting
There are three major systems of Accounting
i) Cash System: Transactions are recorded
as and when actual cash is received or paid.
ii) Single Entry System: Only one aspect is
recorded, or sometimes no transactions are recorded at all.
iii) Double Entry System: Both aspects (Debit and
Credit) are fully and completely recorded.
