Learning Objectives
=> 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
In this chapter, we will discuss the basic concepts of accounting in details. 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 economics 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 of the company.
The American accounting 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 interpret,"
thus, accounting can be summed up as follows:
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 is a paid occupation that requires specialized knowledge for rendering any kind of service. Accounting education is imparted by specialized accounting institutes in deferent nations. for example in India it is imparted by the institute of Chartered Accountants of India.
c. Accounting as a social force: Accounting is now also treated as asocial 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 explain the causes and effects relationships of different phenomenon.
in addition ,there are some basic principles in science. accounting too has certain fundamental principle, such as double entry system. it also has rule 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 adjectives 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 serves this purpose and helps in maintaining
a systematic records of all the transactions affected for a particular.
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.
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 organizations, 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 communication the financial status of an organization to the stakeholders of the company, so that they can make crucial investment decisions.
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. Ratio analysis is the analysis of financial statements of an organization to ascertain its profitability. It helps inn examining the performance and financial condition of an organization.
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 and organisation and take corrective measures at right time.
Owners: Owners need accounting to monitor the performance of their companies. Accounting helps the owners to compare the information of their accounts of different years in the past in order to obtain a vivid picture of their financial performance.
Employees: The payment of bonus, incentives, etc. of employees is dependent on the financial position of a company. The financial position of a company is ascertained through accounting information which proffers employees to assess the company's expansion possibilities and their development opportunities.
Creditors: People who supply goods, services and money on crddit are known as creditors. For example banks, financial institutions and so on. A proper accounting system helps a company to present various books of records such as assets and liabilities, tax paid,etc.
Investors: Investors use accounting information of companies to know their financial progress. Based on the information, investors make investment related decision.
Management: The management of a business uses accounting information to understand if the venture is profitable and can be carried on. Based on the information, management makes decision related to future expansion, mergers, etc.
Government: Accounting information is used by government to determine a company's revenue for taxation purpose.
Accounting process
As discussed, accounting mainly involves identifying, assessing and communication the significant financial information to its user. The information helps users to understand the economic situation of their company and take appropriated decisions. The process of accounting involves a series of steps.. These are shown in the Image
Classifying: In involves systematic analysis of the recorded data' as it shall allow consolidating all the transactions at one place. Classifying is mainly done by maintaining ledgers for different accounts.
Summarizing: It involves analysis of the transactions specifying the reason behind the occurrence of transactions. It is the responsibility of an accountant to interpret the financial statements in a comprehensive manner to enable decision makers to take required measures on time.
Reporting: It involves dissemination of information to its intended users to help them in rational decision making.
Functions of Accounting
The main function of accounting fit to collect and process the financial data of a business organisation into meaningful and relevant information in order to assist managers in decision making. he functions of accounting are discussed as follows:
Record Keeping Function: The primary and basic function of accounting is to record, classify the financial transactions and to further prepare the profit and loss statement and balance sheet of the organisation.
Managerial Function: This function mainly involves decision-making. However, decision making without accounting can be misleading. Moreover, managerial function involves measuring the performance of a company with that of others in the similar industry. This again is possible only with the help of accounting.
Legal function: The auditing is made necessary for all registered firms and can be done through accounting. Thus, a company is required to maintain all the accounts to provide necessary information to the auditors.
A business language: Accounting is treated as a language of business. For example,bankers rely on various kinds of ratios, such as liquidity ratios and profitability ratios, which can only be computed with the financial statements.
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