Accounting involves identifying, measuring, recording, classifying, summarizing, analyzing and communicating financial information about an organization's economic activities. It is the language of business that allows interested users both internal and external to the organization to make informed decisions. Accounting provides useful information to stakeholders by recording transactions, determining profits and losses, assessing the financial position of a business, and assisting in decision making. It has both functional aspects like identifying, measuring and recording transactions, as well as structural aspects as it is a process, means of communication, and deals with historical economic activity.
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INTRODUCTION TO ACCOUNTING.pdf
1.
2. INTRODUCTION
Accounting is called the language of business.
It delivers useful information of the organization to the interested users.
It has got a very wide scope and area of application.
Its use is not confined to the business world alone, but spread over in all the spheres
of the society and in all professions.
Now-a-days, in any social institution or professional activity, whether that is profit
earning or not, financial transactions must take place.
This arises the need for recording and summarizing these transactions when they
occur and the necessity of finding out the net result of the same after the expiry of a
certain fixed period.
Accounting use can help overcome these problems.
Accounting is the systematic recording of financial transactions and presentation of
the related information to the interested users.
3. WHAT IS ACCOUNTING? – MEANING AND DEFINITION
Accounting was generally regarded as a system of record-keeping of all financial
transactions within a business until the 1960s.
In modern times, Accounting is not only the recording of financial transactions but also
storing, sorting, retrieving, summarizing, analyzing the transactions, and presenting the
results in the form of various reports and statements to its users.
Accounting has no universally accepted definition.
Accounting is a comprehensive discipline.
It is difficult to explain satisfactorily through any
single definition.
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4. WHAT IS ACCOUNTING? – MEANING AND DEFINITION
In 1941, The American Institute of Certified Public Accountants (AICPA) had
defined accounting as the art of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at least, of
financial character, and interpreting the results thereof’.
In 1966, the American Accounting Association (AAA) defined accounting as ‘the
process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of information’.
In 1970, the Accounting Principles Board of AICPA emphasized that the
function of accounting is to provide quantitative information, primarily financial
in nature, about economic entities, that is intended to be useful in making
economic decisions.
5. WHAT IS ACCOUNTING? – MEANING AND DEFINITION
After various definitions, the following relevant aspects of the accounting definition are
found:
Economic Events
Identification, Measurement, Recording and Communication
Organization i.e. business enterprises
Interested Users of Information
Source: ncert.nic.in, THE PROCESS OF ACCOUNTING
6. ECONOMIC EVENTS
An economic event is known as a happening of consequence to a business
organization which consists of transactions and which are measurable in
monetary terms.
For example,
Transactions which are
measurable in
monetary terms.
purchase of machinery, installing and keeping it ready for manufacturing is an
Event
expenditure
incurred on its
installation
and trial runs
Site preparation for
installation of machine
transportation of
machine
buying
a machine
comprises
7. ECONOMIC EVENTS
Accounting identifies bunch of transactions relating to an economic
event.
An event involves transactions between an outsider and an organization, these
are known as external events. Such as- Purchase of materials from suppliers,
Sale of merchandise to the customers.
An internal event is an economic event that occurs entirely between the
internal wings of an enterprise. For example- payment of wages to the employees,
supply of raw material or components by the stores department to the
manufacturing department.
8. IDENTIFICATION, MEASUREMENT, RECORDING AND COMMUNICATION
Identification:
It means determining what transactions to record, i.e., to identity events which
are to be recorded.
It involves observing activities and selecting those events that are measurable in
monetary terms.
For example, the value of human resources, changes in managerial policies or
appointment of personnel are important events but none of these are recorded in
books of account.
Measurement:
It means quantification (including estimates) of business transactions into
financial terms by using monetary unit, viz. rupees and paise as a measuring
unit.
If an event cannot be quantified in monetary terms, it is not considered for
recording in financial accounts
9. IDENTIFICATION, MEASUREMENT, RECORDING AND COMMUNICATION
Recording:
After identification and measurement, transactions are recorded in books of
account in monetary terms and in a chronological order.
Recording is done in a manner that the necessary financial information is
summarized as per well-established practice and is made available as and when
required.
Communication:
After recording the transactions, information is communicated in the form of
accounting reports to users such as management, employees, Government,
creditors and other stakeholders.
10. INTERESTED USERS OF INFORMATION
Many users need financial information in order to make important decisions.
These users can be divided into two broad categories:
internal users and
external users.
11. NATURE OF ACCOUNTING
Nature of accounting can be understood from two aspects i.e.
1. Functional aspect
2. Structural aspect
12. FUNCTIONAL ASPECTS OF ACCOUNTING
Functional aspect
Identifying monetary transactions: accounting identifies those transaction which
are measurable in monetary terms. so that it can be accounted for.
Measurement and Recording Transactions: in accounting, the value of a
transaction is measured in money terms. Thereafter, the transaction is recorded in
the books of account. Recording is done in journals.
Classification: in accounting, The huge data needs to be classified in a record
known as a ledger so that transaction of similar type are accumulated at one place.
Summarization: The larger the corporation, the more complex the records.
Therefore, in accounting the records are summarized in a form where it can be
easily understood.
Analysis, Interpretation and Communication: In accounting, the summarized data
is analyzed and interpreted so that it can be communicated to the concerned
stakeholders so that they have a complete knowledge of the financial position of
the company
13. STRUCTURAL ASPECTS OF ACCOUNTING
Structural aspect
Accounting is an art and science: Accounting is an art of recording, classifying,
summarizing and finalizing financial data. It involves definite techniques,
systematic methods and procedures and its proper application requires applied
skills and expertise. So, accounting by nature is an art and a science.
Accounting is a process: A process refers to a method of performing a specific task
step by step in accordance with objectives, or goals. Accounting is recognized as a
process as it performs the specific function of collecting, processing and
communicating financial information step by step.
Accounting is a means and not an end: The main objective of the stakeholder of
the organization is to make decisions based on the financial information provided
by accounting. Thus, accounting is not an end in itself, it helps in achieving a
specific objective. Hence it is said that accounting is a 'means to an end' and it is
not an 'end in itself’.
14. STRUCTURAL ASPECTS OF ACCOUNTING
Structural aspect
Accounting is a language of business: Accounting is also called the language of
business because the activities of an organization are reported in the form of
financial reports and statements using accounting language.
Accounting is an information system: Accounting is recognized and characterized
as a storehouse of information.
Accounting deals with historical economic activity: accounting involves keeping
accurate records of all the past transactions made in the business.
15. OBJECTIVES AND SCOPE OF ACCOUNTING
To keep systematic records: accounting is done to keep systematic record
of financial transactions.
To ascertain profitability: with the help of accounting, we can
evaluate the profits and losses incurred during a specific accounting
period.
To ascertain the financial position of business:
To assist in decision-making: accounting gives the platform to stakeholders
to plan for future with the help of past records.
To fulfill compliance of law: accounting helps in running a business in
compliance with the law
16. BOOK-KEEPING
Bookkeeping is an integral part of accounting.
Bookkeeping means recording the financial transactions and information
concerning the business of a company regularly.
The person in an organization who is employed to perform bookkeeping
functions is usually called the bookkeeper or book-keeper.
They usually write the daybooks which contain records of sales, purchases,
receipts, and payments, and document each financial transaction, whether cash
or credit.
