Introduction to Accounting

INTRODUCTION TO ACCOUNTING

            The main objective of a business is to earn profits. So, it is very important for the business to determine the results of the business at an appropriate interval. For this, it is necessary to record the business transactions and events in a systematic manner. Accounting is the practice of systematically recording, reporting and analysing the financial transactions conducted by a business.

            Accounting is considered as a language of the business as the basic function of any language is to communicate the matter to others. Accounting also communicates the operating and financial performance of business enterprise among its various end users so that they may arrive at rational decision about their stake. Accounting is not only useful to business entities alone, it is equally useful to ‘Not for Profit Organisations’ like hospital, school, club etc.

In brief, accounting may be defined as the process of recording, classifying, summarising and communicating the financial information to the users of accounting service for making rationale decision about the entity.

“Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events, which are, in part at least, of a financial character, and interpreting the results therof. ”    – American Institute of Certifies Public Accounting (AICPA) in 1941

 

CHARACTERISTICS/ ATTRIBUTES OF ACCOUNTING

1. Identification of financial transactions
2. Measurement of transactions
3. Recording
4. Classifying
5. Summarising
6. Analysing and interpreting

7. Communicating

 ACCOUNTING: SCIENCE OR ART

·         Accounting is a science as it is an organised body of knowledge, which is based on certain principles.

·         Accounting is also an art as it involves recording, classifying, summarising and interpreting the financial transactions of a business, which helps in achieving the desired objectives.

 

BOOK-KEEPING, ACCOUNTING AND ACCOUNTANCY

Book Keeping – It is mainly concerned with record keeping or maintenance of books of account. The maintenance of books of accounts includes the following four activities:

(i) Identifying the transactions of financial nature.
(ii) Measuring the identify transactions in terms of money.
(iii) Recording the identify transactions in books of original entry.

(iv) Classifying them into ledger.

 

Accounting – Accounting starts where book-keeping ends. It includes the following activities:

(i) Summarising the classified transactions in the form of Trading and Profit & Loss Account and Balance Sheet.
(ii) Analysing and interpreting the summarised results and drawing meaningful information from Profit & Loss Account and Balance Sheet.

(iii) Communicating the information to various end users of accounting service.

 

Accountancy – Accountancy refers to systematic knowledge of principles and the techniques which are applied in accounting. It explains how to maintain the books of accounts, how to summarise them and how to analyase and communicate it to the users.

OBJECTIVES OF ACCOUNTING

1. To keep systematic record of business transactions.
2. To calculate profit or loss.
3. To know the reasons leading to net profit or net loss.
4. To ascertain the financial position of the business.
5. To ascertain the progress of the business from year to year.
6. To prevent and detect errors and frauds.

7. To provide information to various parties.

ADVANTAGES OF ACCOUNTING

1. Provides complete and systematic records.
2. Provides information about profit or loss.
3. Provides information regarding financial position.
4. Facilitates comparative study.
5. Helps in taking managerial decisions.
6. Helps in the settlement of tax liability.
7. Facilitates in taking loan.
8. Acts as proof in the court of law.
9. Helpful in detecting errors and frauds.

10. Helps in sale of business.

LIMITATIONS OF ACCOUNTING

1. Based on accounting concepts and conventions.
2. Based on personal judgement.
3. Based on historical cost.
4. Ignores the qualitative information.
5. Affected by window dressing.

6. Depicts unrealistic information.

ACCOUNTING AS A SOURCE OF INFORMATION

1. Provides information for making economic decisions.
2. Serve the users who rely on financial statements as their principal source of information.
3. Provides information for making inter-firm and intra-firm comparison.
4. Provides information for judging the managerial efficiency.
5. Provides input for making analysis and interpretation of financial statements.

6. Provides information about corporate social responsibility of the entity.