What is Accounting ?

Accounting is used as the language of business. Accounting involves the procedures of recording the financial transactions in the books of account which are helpful to its user for analyzing and interpreting the financial soundness of business.

The process of "Financial Accounting" involves the presentation as well as the interpretation of the financial results of a company conduct with a view to make an assessment of its financial performance. Financial accounting provide the requisite information necessary for taking investment decisions.

Definition of Accounting

According to American Institution of Certified Public Accountants (AICPA) :

"Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money transaction and events which are in part at least of a financial character and interpreting the result there of".

With greater economic development the meaning of the term "Accounting" has gradually become broader.

According to American Accounting Association (AAA) :

"Accounting is the process of identifying measuring and communicating economic information to permit informed judgement and decision by users of the information".

According to R. N. Anthony :

"Accounting System is a means of collecting, summarizing, analyzing and reporting in monetary terms the information of the business".

Features of Accounting

The financial accounting is characterized by the following silent features :

1) Monetary Transactions :

In Financial Accounting only those business transactions which can be expressed in monetary terms are taken into account. Transaction of Paramount importance from business point of view which cannot be expressed in monetary terms are out of the preview of the financial accounting.

2) Historical Nature :

Transactions which are likely to take place in future cannot be captured and recorded under the system of financial accounting. Thus, only those transaction which have already taken place in past are taken into account under financial accounting.

3) Legal Requirement :

Financial accounting is a statutory requirement for a company it is monetary to have a proper record of all the monetary transaction taken place during the courses of its business and prepare financial statements like "profit and loss account" and "balance sheet" etc. at the year end. These financial statements are subject to audit also if the level of a company business is beyond a prescribed threshold limit.

4) External Use :

Financial statements prepared on the basis of financial accounting is useful even for those take holder who happened to be external to the business organisation like customer, suppliers, lenders, investors, regulators etc. They can assess the financial health of the organisation on the basis of financial statement and thereby take a correct decision for investment purposes.

5) Interim Report :

Financial statement are the end result of the process of financial accounting. However they are not considered as final report as they are interior in nature.

6) Disclosure of Financial Status :

The financial statement of a company reveals its performance during a particular period and financial status health as on a particular date.

7) Financial Accounting Process :

The various steps involved in the process of financial accounting vary according to the accounting policies adopted by the various companies. Such accounting policies generally pertain to :

Valuation of inventories and
Calculation of depreciation on asset, for which a number of options are available for the companies.

Scope of Accounting

The scope of accounting is wide ranging and is evident from the following :

1) Business Forecasting :

A business entity is interested in a certain in its future level of business on the basis of its path as well as present level of the business activities such forecasting enables it to check out strategies in advance relating to Future Plans with regards to the level of existing activities.

For Example, If a manufacturing unit engaged in the manufacturing of "Sports Shoes" want to go ahead for expansion and purification of its activities into manufacturing of formal shoes the "Accounting" may prove to be extremely helpful for taking appropriate forecasting decision.

2) Proper Decision Making :

A company is frequently required to take important decisions regarding :

Fixing the price of finished goods on the basis of their cost,
Investment level in new projects,
Distribution of dividend and bonus,
Increase in salary and wages of its employees/labours.

Such decisions need to be taken very carefully as any wrong decision mail and the company into financial trouble coming out of which may not be that is easy. An efficient and effective accounting system of the company may be of help in taking commercial decision by the management.

3) Correct Taxation :

A company has to fulfill its obligation with regard to liabilities on account of various government taxes. e.g., service tax, income tax, sales tax, excise duty, customs etc. The amount of such taxes is decided on the basis of financial results reflected through financial report. An appropriate Accounting System prevailing in the company facilitate determination of accurate amount of each category of tax.

4) Replacing Memory :

A business entity enter into a number of financial transactions which are complex and degrees find in nature. It is not possible for any business entity to memorize every single transaction. As is transaction is recorded in writing through the accounting system that need to memorize every single transaction is not required.

5) Analyzing the Performance of the Business :

Maintenance of a proper record of every business transactions through accounting enables one to ascertain the performance of a company in term of Income, Expenditure, Profitability etc. In detailed analysis of various subhead items can also be carried out a necessary step may be taken to improve the performance of a company.

6) Analyzing the Financial Status of the Company :

Financial of of a company prepare on the basis of various records of business transaction the status of the business. While the Profit and Loss Account if left the profit made or loss incurred during the particular financial year the Balance Sheet reflect the position of assets and liabilities of the company on a specific date.

7) Documentary Evidence :

Records maintained through accounting have the legal sanctity too. They can be produced as a proof in the court of law to verify the necessary business. As the record of business transaction are based on documentary evidence and each and every entry is supported by a think watcher they are accepted by the court of law as evidence.

8) Helping in Realization of Debts :

As part of accounting process the person ledger account of all the parties with whom a company deals with are prepared. These account reveal the accurate amount due from the debtors as well as the amount payable to the creditors. They may be forwarded to the letters for confirmation of the trees and early payment of the depths. Timely payment to the creditors may also be ensured by the company.

Objectives of Accounting

Objectives of accounting in Points have been summarized as follows :

1) To Communicate Information :

Financial Accounting is helpful to the management of a company majority in the decision-making process by providing financial data and other vital information or facts to different stakeholders viz., creditors, employees, investor, regulator, tax planners or other government authorities etc. Thus, communicating the information of financial data is equally important than other objective of financial accounting.

2) To Keep Systematic Record :

During the conduct of business in number of financial transactions take place. As it is not possible to memorize all the transactions there is a need to record them maintenance of a proper and systematic record of all the business transactions is the main objective of financial accounting.

3) To Ascertain Financial Position :

One of the most important objective of "Financial Accounting" is to enable the management of a business entity to ascertain the financial position of the business i.e., where the business stands what is owned by it and what it on in order to achieve this objective. A balance sheet is prepare at the end of a financial year. The balance sheet the statement of Assets and Liabilities of a business entity as on a particular date.

4) To Determine Profit and Loss :

Preparation of Profit and Loss Account or Income and Expenditure Statement by a business entity helps to achieve next objective of financial accounting. i.e., to determine the figure of profit in earned or loss incurred during and accounting year.

Functions of Accounting

The step-wise Accounting Functions / Accounting Principles are in the following order :

1) Identify :

Identification of the transaction relating to the business directly from the root document.

2) Recording :

Once the business transactions are identified the next step to involve proper recording thereof in terms of money. Such recording of business transactions is carried out in the books terms at journal, which may be further subdivided for convenience take into various "Subsidiary Books".

3) Classifying :

Various business transactions recorded in journal are further Classified on the basis of their nature. Such classification of similar items is followed by their posting in another set of books term as ledger, journal entries are simply recording of various business transactions without any different situation whereas, the "Ledger" posting is done after classified each entry under appropriate head.

For Example, initially transactions pertaining to Income as well as Expenditure are recorded date wise in "Journal". Such records are there after classified into various head of income and expenditure before their ledger posting. A class at the ledger of a particular head enables one to know the total expenditure incurred for income under the head for a specific period.

4) Summarizing :

The summarized information relating to the business transactions of an organisation is very useful for the stakeholders both internal to the specific business as well as those who are external to the business. Internal users are generally the management and employees of the organisation, whereas the external users are the creditors, investor, regulator, taxmen, labour unions, tax planners, trade associations etc.

5) Analyzing :

An in-depth analysis of financial statement, viz. Profit and Loss Account, Balance Sheet and Income Statement of an organisation helps in identifying the financial strength and weaknesses of the organisation. Such analysis as selected in overcoming the weakness and making utilization of the strength for the the betterment of the organisation.

6) Interpreting :

Interpretation of the financial statement is helpful for the management in decision making process and formulating future business pricing strategy with regard to growth, expansion and diversification. Other stakeholders are also benefited from search data in taking decisions from their perspective.

7) Communicating :

Communicating the duty summarized and analysed financial daughter to other stakeholders, enables them to interpret the same in their own way making their interest into consideration for taking decision making at their level.

Advantages of Accounting

Accounting has over a period of time become an integral part of a business or organisation without, which no business entity can survive broadly the advantages of accounting are as follows :

1) Helps in Management :

The information generated through the process of "Accountancy" enables the management of a company to perform their job in an efficient manner by appropriate planning, monitoring and taking decisions to the advantage of the business organisation.

2) Assistance to an Insolvent Person :

In the event of an individual becoming insolvent he is required to explain a number of business activities undertaken during the conduct of business by him. This process become extremely both if proper books of account where maintained by him.

3) Sale of Business :

In case of Businessman decides to dispose of his business maintenance of proper and accurate books of account become and Lee in estimating the cost of the business setup and finalization of the "Purchase Price" by the purchaser.

4) Substitute to Memory :

Accounting necessitates recording of all the business transactions in a specific and classified manner. These eliminates the need to memorize all the transaction entered into by a business organisation.

5) Comparative Study :

The end products of "Accounting" financial statement in the form of Profit and Loss Account and Balance Sheet, which allows the management of a company to compare the annual result of a year and initiate requisite actions necessary for the growth of the business.

6) Statement of Taxation Liability :

Proper maintenance of books of account in sure hassle free assessment of tax liabilities by various government department especially Income Tax, Service Tax and Sales Tax authorities.

7) Evidence in Court :

A systematic record of all the business transactions may be produced as evidence in the court of law. Courts are inclined to accept such records as good evidence.

Disadvantages of Accounting

Despite the advantages of accounting, its process also suffers from certain limitations, which may be considered as the disadvantages of accounting they are as follows :

1) Rule of Consistency :

Some of the companies, at times fail to observe the basic tenets of accounting. The underlying principles are compromised in certain cases. This is especially true in the case of depreciation on fixed assets as few companies tend to frequency changes their policy relating to depreciation on fixed assets from year to year. Inconsistency arising due to following the Policy of "Straight Line Method" during one year and "Written Down Value Method" during the next year result in failure in the correct picture of the company's performance.

2) Basis on Estimates :

Accounting data recorded in the books of accounts are some time based on estimation instead of the actual search data need not be correct and reliable.

3) Non Monetary Item Over Looked :

Under the accounting system all the business transactions which can be expressed in terms of money are recorded. Business transaction which are non monetary in nature are completely out of the purview of the existing "Accounting System".

4) Original Cost :

The original cost is taken into consideration while recording the details of fixed asset the amount spent on them, which logically should be added to their acquisition cost is not taken into account. As a result there true value is not reflected in the "Balance Sheet" of the business entity.

5) Possibility of Manipulation :

The accounting system envisages profit to be the only parameter to access the performance of the company's management. This concept is in logical and need not be considered trustworthy, as certain major items especially those relating to research and development advertisement etc. are excluded. Further the possibility of certain manipulation cannot be ruled out.

Branches of Accounting

Several branches of accounting have developed with the passage of time they can be broadly categorized as mentioned below :

1) Financial Accounting :

It is that branch of accounting which deals with the past data of the business, which is generally for one year and ends with the preparation of "Financial Statements" like :

Profit and Loss Account, indicating the profit earned or losses incurred during a particular period,
Balance Sheet, indicating the financial position i.e. assets and liabilities held as on the last day of the accounting period.

The "Financial Statements" are prepared on the basis of Generally Accepted Accounting Policies (GAAP) articulated by the accounting professional and other statutory provision and accounting standard such a statement are more useful for the stakeholder and outside of the business entity.

2) Management Accounting :

It is that branch of accounting, which is "Forward Looking" and "Futuristic" in nature rather than dealing with historical data and generally involve "Cost Accounting" and "Budgeting". Its aim to provide inside reporting to the manager of a company. While preparing various statement under management accounting, it is not necessary to ensure compliance with the provision of Generally Accepted Accounting Principles (GAAP) articulated by the accounting professionals and other statutory provision and accounting standards. The essence of "Management Accounting" lies in the fact that it highlight the Control, Planning and Decision-Making aspect of the accounting. The framework of management accounting is specifically designed to serve the requirement of a particular company management.

3) Cost Accounting :

It is that banks of accounting which deals with costing aspects of the business transactions. All the cost i.e. present and future are recorded classified and reported under "Cost Accounting". It is an accounting process used to determine cost of production of a business entity by analyzing input and fixed cost of production it also capture the cost of operations of a business. Cost is measured by the using of various Tools and techniques to :