Accounting is the art of recording, classifying, and summarizing financial transactions, leading to the analysis and interpretation of financial data for decision-making. It encompasses branches like financial, cost, and management accounting and offers benefits such as insights into financial performance and aid in management decisions. However, accounting has limitations, such as ignoring qualitative factors and price level changes, and involves key concepts like the business entity concept and the accounting equation.

1. Meaning of Accounting
Accounting is an art of recording,
classifying and summarizing in a
significant manner in terms of money,
transactions and events which are, in part,
at least of financial character, and
interpreting the results thereof.

2. Characteristics/ Objectives/ Functions
of Accounting
 Identification of financial transactions and events- Accounting
records only those transactions and events which are of financial
nature as they bring change in the resources of a firm.
 Measuring the identified transactions- Accounting measures
the transactions and events in terms of common measurement
unit i.e. the currency of the country. In other words, financial
transactions and events are measured in terms of money.
 Recording- Accounting is an art of recording business
transactions in the books of accounts.
 Classifying- Accounting is an art of classifying business
transactions. Classification is the process of collecting similar
transactions at one place by opening accounts in the ledger
book.

3.  Summarizing- Accounting is an art of summarizing financial
transactions. This involves presenting the classified data in a
manner which is understandable and useful to the users of the
accounting statement. This process leads to preparation of Trial
Balance, Trading & Profit and loss account, Balance Sheet.
 Analysis and Interpretation- Financial data is analyzed and
interpreted so that the users of financial data can make a
meaningful judgment of the financial performance (profit) and
financial position of the business. Analysis helps in planning for
future in a better way.
 Communicating- Accounting function involves communicating
the financial data i.e. Financial statement to its users.

4. Branches of Accounting
Financial
Accounting
Cost Accounting
Management
Accounting
 Financial Accounting- It is that branch of accounting which
records financial transactions and events, summarizes and
interprets and communicate the results. It ascertains profits earned
or loss incurred during an accounting period and the financial
position on the date when the accounting period ends.

5. Cost Accounting- Cost accounting ascertains the cost of product
manufactured or services rendered and helps the management in
decision making and exercising control.
 Management Accounting- It is the most recently developed
branch of accounting. It is concerned with generating accounting
information related to funds, costs, profits, etc, as it enables the
management in decision making.

6. Advantages of Accounting
 Financial information about business- Financial performance during
the accounting period i.e. profit or loss and also the financial position at
the end of the accounting period is known through accounting.
 Assistance to management- The management makes business plans,
takes decisions, exercises control over the affairs on the basis of
accounting information.
 Replaces Memory- A systematic and timely recording of transactions
obviates the necessity to remember transactions. The accounting
record provides the necessary information.
 Facilitates Comparative study- A systematic record enables a
businessman to compare one year’s result with those of other years
and locate significant factors leading to change, if any.
 Facilitate settlement of Tax liabilities- A systematic accounting record
immensely helps in settlement of income tax, sales tax etc. Since, it is a
good evidence of the correctness of transactions.

7.  Facilitates loans- Loan is granted by the banks and financial institutions
on the basis of growth potential which is supported by the performance.
Accounting makes available the information with respect to performance.
 Evidence in court- Systematic record of transactions is often accepted
by the courts as good evidence.
 Facilitate sale of business- If someone desires to sell his business, the
accounts maintained by him enable the ascertainment of the proper
purchase price.
 Helps in making decision- Accounting helps in taking a large number of
decisions like the amount to be withdrawn by the proprietor, the price at
which goods should be sold, etc.

8. Accounting is not fully exact- Although most of the transactions are
recorded on the basis of evidence such as sale or purchase or receipt of
cash, yet some estimates are also made for ascertaining profit or loss.
 Accounting does not indicate the realizable value- The balance sheet
does not show the amount of cash which the firm may realize by the sale
of all the assets. This is because many assets are not meant to be sold,
they are meant for use and are shown at cost less depreciation that may
have been written off.
 Accounting ignores the qualitative elements- Since, accounting is
confined to monetary matters only, qualitative elements like quality of
staff, industrial relations and public relations are ignored.
Limitations/ Disadvantages of
Accounting

9.  Accounting ignores the effect of price level changes-
Accounting statement are prepared at historical cost. Money as a
measurement unit, changes in value. It does not remain stable.
Unless price level changes are considered while preparing
financial statements, accounting information will not show true
financial results.
 Accounting may lead to window dressing- The term window
dressing means manipulation of accounts so as to conceal vital
facts and present the financial statements in such a way as to
show better position that what it actually is.

10. Accounting Concepts
 Business Entity concept- A business and owner should be treated
separately as far as their financial transactions are concerned.
 Money measurement concept- only business transactions that can be
expressed in terms of money are recorded in accounting though
records of other types of transactions may be kept separately.
 Dual Aspect concept- For every credit, a corresponding debit is made.
The recording of a transaction is complete only with this dual aspect.
 Going Concern Concept- In accounting, a business is expected to
continue for a fairly long time and carry out its commitments and
obligations. This assumes that the business will not be forced to stop
functioning and liquidate its assets at ‘fire- sale’ prices.
 Cost Concept- The fixed assets of business are recorded on the basis
of their original cost in the first year of accounting. Subsequently,
these assets are recorded minus depreciation. No rise or fall in market
price is taken into account. The concept applies only to fixed assets.
 Accounting Year concept- Each business chooses a specific time
period to complete a cycle of the accounting process as per fiscal year
or calendar year.

11.  Matching concept-This principle dictates that for every
entry of revenue recorded in a given accounting period,
an equal expense entry has to be recorded for correctly
calculating profit or loss in a given period.
 Realization concept- According to this concept, profit is
recognized only when it is earned. In advance or fee paid
is not considered a profit until the goods or services have
been delivered to the buyer.

12. Accounting Conventions
 Conservatism- It is the convention by which, when two
values of a transaction are available, the lower value
transaction is recorded. By this convention, profit should
never be overestimated, and there should always be a
provision for losses. In other words, do not anticipate a
profit but provide for all possible losses.
 Materiality- It means that all material facts should be
recorded in accounting. Accountants should record
important data and leave out insignificant information.
 Consistency- Accounting practices once selected and
adapted, should be applied consistently year after year.
 Full Disclosure- It entails the revelation of all information
both favorable and detrimental to a business enterprise, and
which are of material value to creditors and debtors.

13. Accounting Equation
Accounting equation is a mathematical expression
which shows that the assets and liabilities of a firm
are equal.
An accounting equation is based on dual aspect
concept of accounting.
We can express accounting equation as:
Assets= Liabilities+ Capital