3. INTRODUCTION
"Accounting' or 'Accountancy is a very old economic discipline and a began in some form since when man's
business or financial activity carted.
'Accounting' is concerned with provision of information to all those who are required to make correct and
sound business decisions. For example an investor would like to know the financial position of an enterprise
before investing his money in it.
Similarly, the management of business organization would like to know which of its products have been
successful.
After getting the required information from the account books of the firm it can be decide whether to stop
producing the unsuccessful product or to take necessary remedial measures to make the products more appealing
to their consumers.
This aspect of accounting has gradually assumed so much importance that it is now considered und used as an
information and feedback system.
Definition Accounting may be defined as the process of identifying, measuring, recording and communicating
the economic events of an organization to the interested users of the information.
Accounting plays a very significant role in the economic affairs of Society as it provides much needed
information to the concerned management at all levels as well as to them who have a direct financial Interest in
particular enterprise, such as, present and would be investors as also creditors.
Accounting information is also important for them who have indirect financial interest, such as, tax authorities,
labour unions, trade associations, stock exchanges and customers etc.
4. Objective of accounting
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Calculation of
profit and loss
Depiction of
financial position
Availability of
information to
various users
To comply legal
requirements
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Maintain proper
records of business
5. 1. Maintain proper records of business- This is done by recording all business transactions in a ledger
regularly with a view to preparing necessary financial statements as and when required.
2. Calculation of profit and loss- This information is available from the Profit and Loss statement.
3. Depiction of financial position- A Balance Sheet depicts financial position of an enterprise.
4. Availability of information to various users- There are types of users which need information:
a) Internal users- The officers and staff of an enterprise p useful and timely information for making various
business decisions. The information required by internal users are:-
1. Net profit earned by the company in last accounting period
2. Whether the company has enough cash in hand to make payment to debtors.
3. The products which are more profitable.
4. The products which are not making profit or having les demand in the market.
5. The cost of manufacturing of each product.
6. The capital/money required to expand the business.
6. b) External users- The investors, creditors, tax authorities, labor unions, trade associations, stock exchanges
and customers fall in this category. They are not in a position to get direct information about the financial state
of the business concern. They have therefore to rely on financial statements (such as Balance Sheet, Profit and
Loss Statement etc.)
The external users are mostly interested in the following information:-
The assets and liabilities of the business enterprise to evaluate its financial position. Brake
The amount and the time of payment of dividend/ interest to share holders and investors.
The performance and the earning capacity of the business enterprise.
5. To comply legal requirements- In case of companies, auditing is compulsory. Auditing is not possible
without accounting. accounting should be done in such a way that it complies with requirements. The income-
tax returns and financial statements w are required to be filed by various institutions, are made from accounting
information.
7. limitations of accounting
The scope of accounting is restricted to the limits
laid down by various laws.
The transactions which cannot be expressed in
terms of money
In accounting cost concept is followed. The
changing prices are not taken into account
Convention of materiality is followed in accounting. Hence, all
material items must be disclosed in financial statements. The
immaterial information is not recorded in financial accounting
The accounting policies are framed by the accountants
according to their own individual judgments. It is a subjective
factor. The objective factor is completely ignored
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In accounting. provision is made on the concept of conservation
for prospective losses like bad and doubtful debts but no
provision is made for prospective profits.
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9. 1. Financial accounting- It is mainly concerned with record- keeping directed towards the preparation of Profit
and Loss Account and Balance-Sheet.
The main purpose of financial accounting is-
(a) To prepare the necessary accounts and balance-sheet.
(b) To record the transactions which concern or effect the business.
(c) To apprise the owners of the business about the financial state of the business.
2. Cost accounting- It is the process of accounting for costs. It is systematic procedure for determining the unit
cost of output produced services rendered. The main function of cost accounting is to find out the cost of
product and to help the management in controlling its cost.
3. Management accounting- It is primarily concerned with the supply of information which is useful to the
management in making decisions for smooth and efficient running of its business. Another important function
of management accounting is to enable the business to earn maximum profit by effective management of
finance.