FUNDAMENTEL OF ACCOUNTING

Introduction to Accounting

Accounting is used in all the organizations whether it is manufacturing, trading or non-business organizations, which include schools, hospitals, libraries, etc. It is the process of assessing all business activities, processing the large financial information into reports for decision makers, such as investors, management, creditors, etc. People who practice accounting are known as accountants.

Learning objectives

After studying this chapter, you will be able to

Define accounting

Discuss the objectives and significance of accounting

Explain the process of accounting

List the advantage and disadvantages of accounting

Comprehend the functions of accounting

Explain the concept of book keeping

Introduction

Accounting is used in all the organizations whether it is manufacturing, trading or non-business organizations, which include schools, hospitals, libraries, etc. It is the process of assessing all business activities, processing the large financial information into reports for decision makers, such as investors, management, creditors, etc. People who practice accounting are known as accountants.

In other words, all organization's, including profit making or non-profit making ventures require money for various activities. Therefore, it is imperative to keep a track of the financial transactions. Accounting system helps companies in recording their transactions and ascertain their economic conditions. Accounting is also regarded as a language of business used for communicating the financial status of an organization to the stakeholders of the company, so that they can make crucial investment decisions.

In this chapter, we will discuss the basic concepts of accounting in detail. The chapter defines the meaning of accounting. In this chapter, we will also describe the process of accounting. We will also list the advantages and disadvantages of accounting. We will also describe the functions of accounting. Further, we will explain the concept of book-keeping.

Defining Accounting

Accounting can be defined as the process of recording, classifying and summarizing economic information of a company in a comprehensive manner in order to assist users to make significant financial decisions. The main objective of accounting is to ascertain the profit and loss and financial condition of the enterprise or the company.

The American Accounting Association defines accounting as, "the process of identifying; measuring and communicating economic information to permit informed judgements and decisions by users of the information."

According to N. Sarkar, "Accountancy may be defined as the art and science of re-arranging the accounts as maintained by a book-keeper and preparing statements based on them to interpret."

Thus, accounting can be summed up as follows:

INPUT PROCESS OUT PUT

Economic events Recording Classifying Communicating

Measured in Summarizing Information

Financial Items Analyzing to users

Interpreting

Aspects of Accounting

a. Accounting as a service activity: Accounting is treated as a service activity because its function is to facilitate financial information of economic entities to enable an organization's management to make financial decisions etc.

b. Accounting as profession: Accounting is also regarded as a profession. A profession is a paid occupation that requires specialized knowledge for rendering any kind of service. Accounting education is imparted by specialized Accounting Institutes in different nations. For example, in Indian it is imparted by the Institute of Chartered Accountants of India.

c. Accounting as a social force: Accounting is now also treated as a social force as accountants are responsible for protecting the interests of all the people associated with a company. Reliable and accurate accounting information can help in safeguarding public interest. For example, the accounting information can be used by organizations to determine and control of prices.

d. Accounting as science: science can be defined as a systematized body of knowledge that explains the causes and effects relationships of different phenomenon. In addition, there are some basic principles in science. Accounting too has certain fundamental principles, such as double entry system. It also has rules of journalizing for recording financial transactions in original books of entry. In this respect, accounting is a science.

e. Accounting as an art: The base for any type of art is knowledge, skills, interest and experience to perform an activity efficiently. Similarly, accounting is also required to be performed by a skilled professional who have knowledge and expertise in the field. Thus, accounting can be regarded as an art.

Objectives of Accounting

The objectives of accounting may vary from company to company. However, there are some common objectives of accounting which are described as follows:

Maintaining records: In practice, it is quite difficult to memories all the business transactions, hence it is accounting which servers this purpose and helps in maintaining a systematic records of all the transactions affected for a particular period.
Determining the results of the operation: Accounting helps in determining the results of various operations, i.e. profit and loss earned during a specific time period and growth in assets and liabilities which can be determined through the balance sheet of the organization.
Ascertaining the financial position of the organization : Once the profit and loss statement and balance sheet are prepared, the further analysis can be done in the form of ratio analysis can be done in the form of ration analysis. Ration analysis is the analysis of financial statements of an organization to ascertain its profitability. It helps in examining the performance and financial condition of an organization.
Determining the liquidity position : Liquidity refers to the ability of a company to convert its assets into cash within a short period of time in order to meet its short-term liabilities such as bank loans, accounts payable, wages to workers etc. Financial statements such as profit and loss statement, balance sheet, etc. help in determining the liquidity position of an economic entity.
Protecting business properties : Maintaining proper and comprehensive accounting activities can help in assessing the information related to assets and liabilities. The availability of complete information helps business persons to understand the problems related to the financial conditions of an organization and take corrective measures at right time.

Significance of Accounting

The significance of accounting is not just limited to business owners, it has equal importance for other entities too, such as the government, investors, creditors, etc. The importance of accounting can be described as follows:

Owners

Employees

Creditors

Investors

Management

Government

Accounting Process

As discussed, accounting mainly involves identifying, assessing and communicating the significant financial information to its user. The information helps users to understand the economic situation of their company and take appropriate decisions. The process of accounting involves a series of steps. Let us discuss the steps.

Recording
Classifying
Summarizing
Interpreting
Reporting

Book Keeping

A vital part of accounting is book keeping, wherein financial transactions of a company are recorded and arranged in a systematic manner. According to R. N. Carter, Book-keeping is the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or money's worth." In the words of William Pickles, "the system of Book-keeping, which is also almost universally employed, is that whereby every debit has a credit".

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