Accounting Definition

American Institute of Certified Public Accountants

(AICPA)

Defines accounting as an art of recording,

classifying, and summarising in a significant manner
in terms of money and events which are, in part at le
of a financial character and interpreting the results the

According to American Accounting Association(in 1966)

The process of identifying, measuring and communicat
economic information to permit informed judgments and
decisions by the users of accounts

Accounting Principles
Accounting

Concepts
Accounting Conventions

ACCOUNTING CONCEPTS
In order to make the accounting language
convey the same meaning to all people & to
make it more meaningful, most of the
accountants have agreed on a number of
concepts which are usually followed for
preparing the financial statements. These
concepts provide a foundation for accounting
process. No enterprise can prepare its
financial statements without considering
these concepts.

1) BUSINESS ENTITY CONCEPT

Business

is treated as separate &

distinct from its members
Separate set of books are prepared.
Proprietor is treated as creditor of the
business.

2) MONEY MEASUREMENT
CONCEPT
Transactions

of monetary nature are

recorded.
Transactions of qualitative nature,
even though of great importance to
business are not considered.

3) GOING CONCERN
CONCEPT
Business

will continue for a long

period.
As per this concept, fixed assets are
recorded at their original cost &
depreciation is charged on these
assets.
Because of this concept, outside
parties enter into long term contracts
with the enterprise.

4) ACCOUNTING PERIOD
CONCEPT
Entire

life of the firm is divided

into time intervals for ascertaining
the profits/losses are known as
accounting periods.
Accounting period is of two typesfinancial year(1st Apr to 31st March)
& calendar year(1st Jan to 31st
Dec).

5) HISTORICAL COST CONCEPT

Assets

are recorded at their original

price.
This cost serves the basis for further
accounting treatment of the asset.
Acquisition cost relates to the past
i.e. it is known as historical cost.

6) DUAL ASPECT CONCEPT

Every transaction recorded in books
affects at least two accounts.
If one is debited then the other one
is credited with same amount.
This system of recording is known
as DOUBLE ENTRY SYSTEM.
ASSETS = LIABILITIES + CAPITAL

7) PERIODIC MATCHING OF COSTS AND

REVENUE CONCEPT
Income made by the business during
a period can be measured only
when the revenue earned during a
period is compared with the
expenditure incurred
for earning that revenue.

8.REALISATON CONCEPT
According

to this concept revenue is

recognised when a sale is made. Sale
is considered to be made at the point
when the property in goods passes to
the buyer and he becomes legally
liable to pay

ACCOUNTING CONVENTIONS
An accounting convention may be
defined as a custom or generally
accepted practice which is adopted
either by general agreement or
common consent among
accountants.

1) CONVENTION OF FULL
DICLOSURE
Information

relating to the economic

affairs of the enterprise should be
completely disclosed which are of
material interest to the users.
Proforma & contents of balance sheet
& P&L a/c are prescribed by Companies
Act.
It does not mean that leaking out the
secrets of the business.

2) CONVENTION OF
CONSISTENCY
Accounting

method should remain

consistent year by year.
This facilitates comparison in both
directions i.e. intra firm & inter firm.
This does not mean that a firm
cannot change the accounting
methods according to the changed
circumstances of the business.

3) CONVENTION OF
CONSERVATISM
All

anticipated losses should be

recorded but all anticipated gains
should be ignored.
It is a policy of playing safe.
Provisions is made for all losses even
though the amount cannot be
determined with certainity

4) CONVENTION OF
MATERIALITY

According to American Accounting

Association, An item should be regarded
as material if there is reason to believe
that knowledge of it would influence
decision of informed investor.
It is an exception to the convention of full
disclosure.
Items having an insignificant effect to the
user need not to be disclosed.

Definition of Management
Accounting

According to the
Chartered Institute of Management Accountants(CIMA),
Management Accounting is"the process of identification,
measurement, accumulation, analysis, preparation,
interpretation and communication of information used by
management to plan, evaluate and control within an entity
and to assure appropriate use of and accountability for its
resources. Management accounting also comprises the
preparation of financial reports for non-management
groups such as shareholders, creditors, regulatory agencies
and tax authorities"

Financial Accounting V/s

Management Accounting
Financial Accounting

Importanc the financial accounting ,

e
the origin of preservation
of
knowledge
gives
emphasis on recording
keeping on a whole firm
basis for the purpose of
decisions by all the users
of accounting information,
both external and internal

Management Accounting

Management
accounting uses cost
data for provision of
information for strategic
management decisions.
It is mainly concerned
with the provision of
help to the managers to
asses them in the
process
of
decision
making
and
design
business strategies.

Financial Accounting

Management Accounting

Department: Preparing financial

accounting is the work of
finance department.

Managerial accounting is
not specific task of
particular department. coordination of all
department creates
management accounting.

Mandatory
Vs. optional:

There are no legal

requirements to prepare
reports on management
accounting.

Preparing financial
accounting reports are
mandatory especially for
limited companies.

Financial Accounting

Management Accounting

Financial accounting is
strictly required to follow
GAAP.

GAAP is not mandatory for

Management Accounting.

Time span:

Financial accounting
statements are required
to be produced for the
period of 12 months.

No specific time span is

fixed for producing financial
statements.

Monetary
Vs. nonMonetary:

Most financial accounting

information is of a
monetary nature.

Management accounting
information may be
monetary or alternatively
non monetary.

Relevance
Vs.
precision:

Financial accounting
emphasizes on precision.

Management Accounting
emphasizes on relevance.

Format:

Financial accounts are

No specific format is
supposed to be in
designed for management
accordance with a specific accounting systems.
format by IAS so that
financial accounts of
different organizations
can be easily compared.

GAAP:

Financial Accounting

Management Accounting

Planning and
control:

Financial accounting
helps in making
investment decision, in
credit rating.

Management Accounting
helps management to
record, plan and control
activities to aid decisionmaking process.

External Vs.
Internal:

A financial accounting
system produces
information that is used
by parties external to the
organization, such as
shareholders, bank and
creditors.

A management accounting
system produces
information that is used
within an organization, by
managers and employees.

Financial Accounting

Management Accounting

Users:

Financial accounting reports

are primarily used by external
users, such as shareholders,
bank and creditors.

Management accounting
reports are exclusively
used by internal users
viz. managers and
employees.

Objectives
:

The main objectives of

financial accountng are :i)to
disclose the end results of the
business, and ii)to depect the
financial condition of the
business on a particular date.

The main objectives of

Management Accounting
are to help management
by providing information
that used by
management to plan,
evaluate, and control.

Accountin
g process:

Follows a full process of

recording, classifying, and
summmarising for the purpose
of analysis and interpretation
of the finnancial information.

Cost accounts are not

preserved under
Management Accounting
but analyses necessary
data from financial
statements and cost
ledgers.