Meaning of Accounting: According to AICPA Accounting is 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 a financial character, and interpreting the results thereof.
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Meaning of Accounting, Scope of Accounting
From the above, we can conclude that accounting refers to:
- a procedure for writing financial transactions and events.
- a system of recording, classifying, summarizing, analyzing, interpreting, and reporting periodically, in terms of money, which provides necessary financial information.
Accounting accumulates data systematically and supplies the necessary information to the users of financial statements with the help of which the users can make proper economic decisions and also may make proper predictions. Must Check Revenue Expenditure.
Accountancy is a broader and more flexible concept and requires more understanding than bookkeeping, which includes merely the process of recording of transactions; whereas accountancy includes further activities like classifying, summarizing, analyzing, interpreting, and reporting. Accounting reports give more information than bookkeeping records.
Branches of Accounting
Accounting has three branches:
Financial Accounting:
- It is concerned with the maintenance of the Books of Accounts of an enterprise,
- recording and classifying all its financial transactions and events to prepare Annual Financial Accounts
- which can be used by various stakeholders. (i.e. General Purpose Financial Statement)
Management Accounting:
- It refers to the use of accounting data with Proper analysis in reporting, to serve the need of management.
- To help them in decision-making and exercising proper control.
Cost Accounting:
- Generally manufacturing concerns maintain cost accounts
- to ascertain the cost of goods manufactured or services rendered with the proper break-up of cost and
- also providing useful data to management for effective cost control. You may also like Bridge Finance.
Need and Use of Accounting:
- To solve the day-to-day financial and operational problems, it becomes necessary to know about past and present economic events.
- Accounting is developed out of the need to communicate necessary information about events.
- Maintenance of accounts would become unnecessary if a decision-maker could remember and observe all the relevant financial events personally.
- This is not possible due to the following facts:
- since it is not possible for a human being to remember all the events that occurred at different places and at different times.
- all attributes of an event are not equally useful and important to the users.
- In a Medium and Large size organization, the decision maker will not handle all the financial transactions and events personally and hence there’s no question of remembering.
Basic care to be taken in the maintenance of Accounts to make it useful:
- The events are to be recorded in such a manner as they could easily be comprehended and,
- at the same time, such records may also be used as evidence of the events in the future.
- To avoid ambiguity in the recorded evidence, a clear-cut explanation becomes necessary.
Limitation of accounting:
- Accounting is not an exact science.
- It is based on many assumptions and conventions.
- It involves many estimations which results in subjectiveness.
- There are different alternatives possible for the same item which gives scope for manipulation to get the desired result.
- It cannot record the effect of many important events that cannot be measured in terms of money like the value of human resources that an enterprise has.
- It does not consider the effect of inflation on income, expense, assets, and liabilities.
Functions of accounting data
Accounting data serves the following functions:
- Measurement: Account data helps to measure the performance and financial position of the enterprise. It measures Assets, liabilities, Expenses, and Incomes.
- Forecasting: Based on past accounting data, forecasting about plans are made.
- Decision Making: Various decisions require timely and correct information which is provided by accounts.
- Evaluations: Evaluation of an enterprise’s performance and financial health is done from accounting data.
- Control: By adopting various accounting techniques, checks and balances the activity of the enterprise is controlled.
(vi) Govt. regulation and Taxation: Accounting data serves the various requirements of govt. regulations and to assess proper tax liability.
The users of financial statements and their information needs:
| Sr. No. | Users | Their information needs |
| 1 | Investors (providers of risk capital and their advisors) – existing and potential | Information to determine whether they should buy, hold or sell, the shares of the company. The owners of proprietary/ partnership concerns want to assess performance and financial health, to decide the continuance of such unit. |
| 2 | Managers/ Directors | Information to make decisions that have a bearing on the performance of the enterprise to ensure proper return on capital employed. |
| 3 | Employees (Employees and their representative groups i.e. unions) | Information that enables them to assess the ability of the enterprise to provide remuneration, retirement benefits, and employment opportunities. To assess their Bonus and other claims. |
| 4 | Lenders | Information that enables them to determine whether their loans and the interest thereon, will be paid when due. |
| 5 | Suppliers and other trade creditors | Information that enables them to determine whether the amounts owing to them will be paid when due. |
| 6 | Customers | Information about the continuance of an enterprise especially when they have a long-term involvement with, or are dependent on the enterprise. |
| 7 | Government and its agencies | Information to regulate the activities of enterprises, to determine taxation policies, and as the basis of national income and similar statistics. |
| 8 | Public | Information about the trends and recent developments in the prosperity of the enterprise and the range of its activities. |
| 9 | Competitors | Information of a strategic nature to assess their relative strengths and weaknesses and for comparison and benchmarking purposes. |
Qualitative characteristics of financial statements:
- Qualitative Characteristics are the attributes (features) that make the information provided by financial statements useful to the users.
- Qualitative Characteristics are as follows:
Understandability: The information should be readily understandable to those who have reasonable knowledge of business and economic activity.
Relevance: Information has relevance when it influences the user’s decision-making. The nature of information and materiality will be considered to decide relevance.
Comparability: It should be comparable with its past data and also with other similar enterprises.
Role of Accounting in the Society
- An accountant with his education, training, analytical mind, and experience is best qualified to provide multiple need-based services to the ever-growing society.
- The services rendered by accountants to the society include the following:
- To maintain the Books of Accounts systematically.
- To act as a Statutory Auditor (for example under the Companies Act, Income Tax Act, or Co-operative Societies Act)
- To act as an Internal Auditor.
- To act as Social Auditor.
- To act as Taxation Advisor.
- To act as Management Accountant.
- To act as Financial Advisor
- To provide Management Consultancy Services.
- To act as Company Law Advisor.
- To act as Liquidator.
- To act as Arbitrator.
- To act as Management Information System Consultant.
- To act in the field of software development.
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RELATIONSHIP OF ACCOUNTING WITH OTHERS:
Relationship of Accounting with other Disciplines like:
- i) Economics ii) Statistics iii) Mathematics iv) Law v) Management
Accounting and Economics:
- Economics is viewed as a science of rational decision-making about the use of scarce resources.
- It is concerned with the analysis of the efficient use of scarce resources for satisfying human wants.
- Accounting overlaps economics in many respects and contributes a lot to improving the management decision-making process.
- Accountants developed the valuation, measurement, and decision-making techniques that may owe to the economic theorems for origin but these are molded in the work environment and suitably tempered concerning relevance, variability, freedom from bias, timeliness, comparability, reliability, and understandability.
- At the macro level, accounting provides the database over which the economic decision models have been developed; micro-level data arranged by the accounting system is summed up to get the macro-level database.
Accounting and Statistics:
- The use of statistics in accounting can be appreciated better in the context of the nature of accounting records.
- But such precision is not essential for making business decisions and hence statistical approximations are sought.
- In accounts, all values are important individually because they relate to business transactions.
- As against this, statistics is concerned with the typical value, behavior, or trend over some time or the degree of variation over a series of observations.
- Statistical methods help develop accounting data in their interpretation and are useful even in valuation.
- Therefore, the study and application of statistical methods would add an extra edge to the accounting data. You may also like Accounting Concepts and Conventions.
Accounting and Mathematics:
- Knowledge of arithmetic and algebra is a prerequisite for accounting computation and measurements.
- The fundamental dual aspect concept of accounting is expressed in the form of a mathematical equation, popularly known as an ‘accounting equation’.
- With the advent of the computer, mathematics is becoming a vital part of accounting.
- The use of the technique of operations research has made accounting all the more mathematical.
- Graphs and charts are being extensively used for communicating accounting information.
Accounting and law:
- An economic entity operates within a legal environment.
- Every country has a set of economic, fiscal, and labor laws.
- All transactions with suppliers and customers are governed by the Contract Act, the Sale of Goods Act, the Negotiable Instruments Act, etc.
- Very often the accounting system to be followed is prescribed by law.
- Legislation about the accounting system cannot be enacted unless there is a corresponding development in the accounting discipline.
- In that way, accounting influences law and is also influenced by law.
Accounting and Management:
- Management is a broad occupational field that comprises many functions and encompasses the application of many disciplines including those mentioned above.
- ‘Management Accounting’ processes accounting data for management decision-making.
- This indicates the linkage between management and accounting.
- Accounting is an essential service function of management.
