Definition of Accounting
2. Accounting is an art: Accounting is an art
Practice and body of knowledge concerned
primarily with
methods for recording transactions,
keeping financial records,
performing internal audits,
reporting and analyzing financial
information to the management, and
advising on taxation matters.
It is a systematic process of identifying,
recording, measuring, classifying, verifying,
summarizing, interpreting and
communicating financial information. It
reveals profit or loss for a given period, and
the value and nature of a firm's assets,
liabilities and owners' equity.
Accounting provides information on the
1.) resources available to a firm,
2.) the means employed to finance
those resources,
3.) the results achieved through their
use.
Nature of Accounting
We know Accounting is the systematic
recording of financial transactions and
presentation of the related information of the
appropriate persons. The basic features of
accounting are as follows:
1. Accounting is a process: A process refers
to the method of performing any specific job
step by step according to the objectives, or
target. Accounting is identified as a process
as it performs the specific task of collecting,
processing and communicating financial
information. In doing so, it follows some
definite steps like collection of data
recording, classification summarization,
finalization and reporting.
of recording, classifying, summarizing and
finalizing the financial data. The word art
refers to the way of performing something.
It is a behavioral knowledge involving
certain creativity and skill that may help us
to attain some specific objectives.
Accounting is a systematic method
consisting of definite techniques and its
proper application requires applied skill and
expertise. So, by nature accounting is an art.
3. Accounting is means and not an end:
Accounting finds out the financial results
and position of an entity and the same time,
it communicates this information to its users.
The users then take their own decisions on
the basis of such information. So, it can be
said that mere keeping of accounts can be
the primary objective of any person or
entity. On the other hand, the main objective
may be identified as taking decisions on the
basis of financial information supplied by
accounting. Thus, accounting itself is not an
objective, it helps attaining a specific
objective. So it is said the accounting is a
means to an end and it is not an end in
itself.
4. Accounting deals with financial
information and transactions; Accounting
records the financial transactions and date
after classifying the same and finalizes their
result for a definite period for conveying
them to their users. So, from starting to the
end, at every stage, accounting deals with
financial information. Only financial
information is its subject matter. It does not
deal with non-monetary information of non-
financial aspect.
5. Accounting is an information system:
Accounting is recognized and characterized
as a storehouse of information. As a service
function, it collects processes and
communicates financial information of any
entity. This discipline of knowledge has
been evolved out to meet the need of
financial information required by different
interested groups.
History of Origin of Accounting
The name that looms largest in early
accounting history is Luca Pacioli, who in
1494 first described the system of double-
entry bookkeeping used by Venetian
merchants in his Summa de Arithmetica,
Geometria, Proportioni et Proportionalita.
Of course, businesses and governments had
been recording business information long
before the Venetians. But it was Pacioli who
was the first to describe the system
of debits and credits in journals and ledgers t
hat is still the basis of today's accounting
systems.
The industrial revolution spurred the need
for more advanced cost accounting systems,
and the development of corporations created
much larger classes of external capital
providers - shareowners and bondholders -
who were not part of the firm's management
but had a vital interest in its results. The
rising public status of accountants helped to
transform accounting into a profession, first
in the United Kingdom and then in the
United States. In 1887, thirty-one
accountants joined together to create the
American Association of Public
Accountants. The first standardized test for
accountants was given a decade later, and
the first CPAs were licensed in 1896.
The Great Depression led to the creation of
the Securities and Exchange
Commission (SEC) in 1934. Henceforth all
publicly-traded companies had to file
periodic reports with the Commission to be
certified by members of the accounting
profession. The American Institute of
Certified Public Accountants (AICPA) and
its predecessors had responsibility for setting
accounting standards until 1973, when
the Financial Accounting Standards
Board (FASB) was established. The industry
thrived in the late 20th century, as the large
accounting firms expanded their services
beyond the traditional auditing function to
many forms of consulting.
The Enron scandals in 2001, however, had
broad repercussions for the accounting
industry. One of the top firms, Arthur
Andersen, went out of business and, under
the Sarbanes-Oxley Act, accountants faced
tougher restrictions on their consulting
engagements. One of the paradoxes of the
profession, however, is that accounting
scandals generate more work for
accountants, and demand for their services
continued to boom throughout the early part
of the 21st century.
Functions of Accounting
Recording:
This is the basic function of accounting. It is
essentially concerned with not only ensuring
that all business transactions of financial
character are in fact recorded but also that
they are recorded in an orderly manner.
Recording is done in the book Journal.
Classifying:
Classification is concerned with the
systematic analysis of the recorded data,
with a view to group transactions or entries
of one nature at one place. The work of
classification is done in the book termed as
Ledger.
Summarizing:
This involves presenting the classified data
in a manner which is understandable and
useful to the internal as well as external end-
users of accounting statements. This process
leads to the preparation of the following
statements: (1) Trial Balance, (2) Income
statement (3) Balance sheet.
Analysis and Interprets:
This is the final function of accounting. The
recorded financial data is analyzed and
interpreted in a manner that the end-users
can make a meaningful judgment about the
financial condition and profitability of the
business operations. The data is also used
for preparing the future plan and framing of
policies for executing such plans.
Communicate:
The accounting information after being
meaningfully analyzed and interpreted has to
be communicated in a proper form and
manner to the proper person. This is done
through preparation and distribution of
accounting reports, which include besides
the usual income statement and the balance
sheet, additional information in the form of
accounting ratios, graphs, diagrams, funds
flow statements etc.
Accounting Core Competencies
Core competencies are specific business
abilities used to create a competitive
advantage in the business environment. A
competitive advantage is the ability to
complete business functions, produce
customer products or provide more value to
consumers better than other companies. The
accounting industry often contains several
core competencies small businesses can
establish in their company. Small business
owners can also learn a few accounting core
competencies to enhance their understanding
of financial information in the business
environment.
Types
Two types of accounting have distinctive
core competencies: financial and
management. Financial accounting is
responsible for reviewing a
company’s accounting information
and assessing its accuracy and validity prior
to review by the business owner, directors or
the general public. Financial accounting core accounting are commonly found in the cost
competencies often relate to understanding allocation, forecasting and budgeting
national accounting principles. processes.
Management accounting is the internal
business function of gathering and recording
financial transactions for management
review. Core competencies in management