Meaning of Accounting

Accounting has rightly termed as the language of the business .The

basic function of a language is to serve as a means of communication .Accounting also serves this function .It communicates the results of business operations to various parties who have some stake in business viz., the proprietor ,creditors ,investors ,government and other agencies. Accounting as an information system is the process of identifying ,measuring and communicating the economic information of an organization to its users who want information to make decisions. It identifies transactions and events of a specific entity .it measures transactions and events in terms of common measurement unit i.e. the currency of a country. It involves collection, recording, classification and presentation of financial data for the benefit of management and outside agencies such as shareholders, creditors, bankers and government.

DEFINITIONS OF ACCOUNTING
According to American Institute of Certified Public

Accountants (AICPA) Accounting is an art of recording, classifying, and summarizing in a significant manner the money transactions and events which are in part at least of a financial character and interpreting the results thereof.
According to American Accountant Associations

(AAA), Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decisions by users of the information.

NEEDS OF ACCOUNTING
Need for accounting is greater for a person to know Whether the receipts are more than the payments Balance of cash in hand Evidence in court in case of dispute Settlement of taxation liability Sale of business The amount ,size and causes of increase or decrease of capital . The amount of loss ,if any . The amount of Assistance to the various parties Nature and value of assets. Nature and value of liabilities.

Accounting as an Information System

Information needs of management : management needs

information for planning, organizing & controlling the activities of business. The supply of information at appropriate time help management in achieving the business objectives Information needs of shareholders & Investors : various laws have been passed under which financial statements should be prepared in such a way that required information is supplied to the shareholders & creditors Information needs of employees: accounting information is required for deciding workers share in profits, setting wages disputes, etc.

 Information needs of creditors : Creditors are mainly

interested in creditworthiness of the business. They need information about liquidity position of the company. So they will study information concerning solvency, liquidity, & profitability of the business. Information Needs of Government : Govt. needs information about sales, profits, liquidity, dividend policy etc.The information helps the govt. in deciding the social & economic policies.

Accounting as an information system

Accounting Decision making

Data Business activities & transactions Recording of data (measuring business transactions Processing of data (preparation and storage of data Communication (as financial Statements & other Statements & reports)

Objectives of Accounting
To maintain records of the business 2. To know profit or loss of the business . 3. To ascertain the financial position of the concern: Nature and value of assets Nature and extent of liabilities Whether the enterprise is solvent or not Whether the business concern is over trading To make information available to various groups and users at a particular time .
1.

Importance of Accounting
Accounting is useful to the following parties

Management or managers 2. Users with direct financial interest 3. Users with indirect financial interest
1.

Accounting

Management: (directors, officers of the company, managers, dept. heads and supervisors) Decisions: Assessing profitability, financial performance in terms of plans & goals, marking plans and policies

Users with direct financial interest: (Present and potential shareholders, creditors, employees, suppliers) Decisions: Share investment decision, credit decisions, assessing company status and prospects, approving supply decisions

Users with indirect financial interest: (customers, taxation authorities, financial analysts and advisors, brokers, labor unions, consumer group general public, press etc.) Decisions: Assessing tax, protecting investors and public interest advising on investment decisions, setting economic policies, measuring social and environmental protection programmed, negotiation labor agreements.

Book Keeping & Accountancy

Book Keeping: It is an art of keeping or maintaining

records in a prescribed manner. It is a part of accounting. Accounting : It is concerned with measurement, analysis, interpretation and use of information. Difference: Objects, scope, mutual dependence, results of the business.

Role of Accountant
Maintenance of books of accounts . 2. Auditing of accounts . 3. Taxation . 4. Financial services .
1.

Branches of Accounting
Financial accounting 2. Cost accounting 3. Management accounting
1.

Financial Accounting
Financial accounting records ,classifies business

transactions and prepares summaries of the same to determine profit and loss and the financial position of the concern .It is that branch of accounting which communicate the financial information of a business unit .

Functions of Financial Accounting

1.
2. 3.

4.
5. 6. 7.

Recording of information Classification of data . Making summaries Dealing with financial transactions . Interpreting financial information . Communicating results Making information more reliable .

Limitations of Financial Accounting

Historical nature
Provide s information about concern as a whole Not helpful in price fixation

Cost control not possible

Only actual costs recorded Quantitative information Chances of manipulation Not helpful in taking strategic decisions

Cost Accounting
Cost Accounting is the classifying , recording &

appropriate allocation of expenditure for the determination of the costs of products or services. It includes the ascertainment of the cost of every order, job, contract, process, service or unit

Functions of Cost Accounting

Analysis and ascertainment of costs.
Presentation of costs for cost reduction & cost control Planning & decision making

Preparation of budgets and implementation of

budgetary control . Ascertaining profitability of each product . Providing useful data to the management for taking decisions .

Importance & Advantages

1.Cost Accounting as an aid to management: a) Provides reliable cost data in regard to material, labor, overhead and other expenses b) Helps in price fixation c) Provides information on which estimates & tenders are base d) Helps in determining profitable & non-profitable activities. e) Helps management in periods of trade depression & competition by determining actual cost of product. f) Provides cost data for comparison in different period g) Useful tool for managerial control & helps in cost reduction & cost control. 2. Helpful to employees - introduction of incentive wage system & bonus plans. 3. Advantages to govt. & society

Limitations of Cost Accounting

It is not independent system of accounts
There is scope of subjectivity on items like

depreciation, valuation of closing stock etc. It does not take into consideration all items of expenses and incomes e.g. items purely financial nature such as interest, discount and loss of shares and debentures etc.

Management Accounting
Management accounting is that system of accounting

which helps management in carrying out its functions more efficiently .It is that field of accounting which deals with providing information for the purpose of planning ,decision-making ,performance evaluation ,control management of costs and determination for financial purpose . According to T.G. Rose Management accounting is concerned with accounting information which is useful to management .

Characteristics of Management Accounting

Providing accounting information
Cause & effect relationship Use of Special Techniques & concepts

Achieving of objective
Taking important decisions No fixed norms followed Supplies information & not decision Concerned with forecasting

Scope of Management Accounting

Financial Accounting Interpretation of data Cost Accounting Control procedures & methods Financial Management Internal audit Budgeting & forecasting Tax accounting Inventory Control Office services Reporting to management

Functions of Management Accounting

Planning and forecasting Modification of data Financial Analysis & interpretation Facilities managerial control Communication Use of qualitative information Coordinating Helpful in taking strategic decisions Supplying information to various levels of management

Financial Accounting

Management Accounting
Is the process of Data identification Measurement Accumulation Analysis Preparation and Analysis Communication of information to management & others

Cost Accounting

Other Sources

Planning & decision-making

FEEDBACK Implementation

MANAGEMENT ACCOUNTING PROCESS

Control

Limitations of Management Accounting

Based on accounting information
Intuitive Decisions Not an alternative to Administration

Top heavy structure

Evolutionary stage Personal bias Psychological resistance

Distinction between Management & Financial Accounting

Management Accounting 1. Object To assist the management in decision-making & policy formulation. Useful to management in formulating plans & policies Financial Accounting To record various business transactions & know financial Useful to Shareholders, creditors, management, employees bankers etc.

2.Usefullness

3. Nature 4. Auditing

Deals with projection of data Concerned with historical for the future data. These cannot be audited Accounts are audited. Under Co-law, auditing of accounts in compulsory

5. Compulsion

It is not compulsory. It is It is compulsory. service function. No emphasis is given to actual Only actual figures are figures. recorded & there is no concern for approximate figures. Reports are meant only for internal use only. Beneficial to different levels of management. Reports are prepared to find out profitability financial position of the concern. Reports are useful for insiders & outsiders.

6. Precision

7. Reporting

8.Describtion

Uses both monetary and non- Momentary transactions are monetary information. recorded. Qualitative things are not recorded. It supplies information from Prepared time to time during whole year. period. These are not published. for a particular

9. Period 10. Publication

Financial accounts are published for the benefit of the public.

Distinction between Cost & Management Accounting

Cost Accounting
1. Object

Management Accounting

To record the cost of producing a To provide information to the product or providing a service. management for policy formulation & planning.

2. Scope 3.Nature 4.Data used 5. Principles Followed

Deals preliminary ascertainment.

with

cost Scope is very wide.

Useful for both past and present Concerned with the projection of recorded. figures in the future. Only quantitative recorded. aspect is Uses both quantitative qualitative concepts. and

Certain principles & procedures No specific rules and procedures are followed for recording costs are followed. of different products.

Distinction between Financial & Cost Accounting

1) Purpose

Financial Accounting Provides information about the profit & loss & financial position of the concern.
Accounts are prepared to meet the requirements of Loss Act and Income Tax Act.

2) Forms of Account

3) Recording

4) Control

5) Periodicity of reporting

It classifies, records & analysis the transactions in a subjective manner i.e. according to the nature of expense. It lays emphasis on the recording aspect without attaching any importance to control. Reports operating results at the Gives information of costs to end of years. management as & when desired.

Cost Accounting Provides information to the management for proper planning operation, control & decision making. These are generally kept Voluntarily to meet the requirements of the management. It records expenditure in an objective manner according to the purposes for which the costs are incurred. It provides detail system of control for materials, labour & overheads costs.

6) Information

Only monetary information is Non-monetary information like used. units is also used.

7. Fixation of S.P.

Not maintained with the object of Provides sufficient data for price fixing selling price. fixation.

8) Figures

Deals mainly with actual facts & Deals partly with facts & figures figures. & partly with estimates.

9) Stock valuation

Stocks are valued at cost or market Stocks are valued at cost. price which is lower.

Accounting Principles
The word principle is used to mean a general law or

rule adopted or preferred as a guide to action, a settled ground or basis of conduct or practice. Accounting principles are the rules of action or the methods and procedures of accounting commonly adopted while recording business transactions. Accounting principles are classified into two parts. (a) Accounting concepts. (b) Accounting conventions.

 The term concept is used to connote basic accounting

Accounting Concepts

postulates i.e. necessary assumptions & conditions upon which accounting is based. 1. Business Entity Concept : in accounting, business is treated as a separate entity from its owners so distinction is made between business transactions & personal transactions. 2. Going Concern Concept : it is presumed that the concern will continue to exist indefinitely or long period of time. The present resources of the concern are utilized to attain the long term objectives of the business. 3. Money measurement Concept : Only the monetary based transaction will be recorded in the accounting books, other transaction will be ignored from the accounting books. Money acts as a medium for immediate exchange of goods and services

Dual Aspect Concept : It is based on the principle that for every debit transaction , there is a corresponding credit transaction. Every transaction is recorded twice because if one is getting then the other is giving. So two entries are made Accounting period Concept: It is the period for which we will prepare our accounts to determine profitability. Cost Concept: Cost price is only recorded in the accounting books, market price will be ignored from the accounting books.

7. Matching Concept: At the end of the period total expenses matched with total revenue to find the profit or loss.

8. Realization Concept : According to this concept

sales or profit on sales will be considered to be realized when either money(cash) is realized or legal obligation is created , i.e. ownership or the title to the good is transferred 9. Matching of Cost & Revenue Concept : All expenses are matched with all the incomes. Because no income can arise without having incurred an expense. Income is the outcome of expense.

Accounting Conventions

Accounting conventions are traditions usage and customs

which are in use since long . 1. Conventions of Disclosure: Material based information (Profit and Loss A/c, Balance Sheet) disclosed to owners, investors and government bodies. This information should not only include figures given in the final accounts but also information which occurs after the preparation of balance sheet but before presentation of financial statements 2. Conventions of Consistency: Accounting principles and practices should not be changed year to year. It may continue for long period of time. There should be uniformity in accounting departments. System once started should not be changed randomly, but should be followed continuously .

3. Conventions of Conservatism : Its all about adopting policy Playing Safe. If there is a possibility of loss, it should be taken into account at the earliest. A prospect of profit should be ignored up to the time it does not materialize. The principle of anticipate no profit & provide for all possible losses is followed 4. Conventions of Materiality Only those items should be recorded which are material (significant) for the firm. According to it immaterial item should not be recorded. An item can be material for one business and can be immaterial for the other. E.g. a single pencil is purchased. Cost of that pencil is immaterial. That can be ignored. Now if hundreds of pencils are purchased, then cost is now material and will be recorded.