FINANCIAL ACCOUNTING : MEANING, NATURE AND ROLE OF ACCOUNTING
1Subject :Accounting for ManagersUpdated by:Dr. Mahesh Chand GargCourse Code : CP-104Lesson No. : 1FINANCIAL ACCOUNTING : MEANING, NATURE AND ROLEOF rigin and Growth of Accounting1.3Meaning of Accounting1.4Distinction between Book-Keeping and Accounting1.5Distinction between Accounting and Accountancy1.6Nature of Accounting1.7Objectives of Accounting1.8Users of Accounting Information1.9Branches of Accounting1.10 Role of Accounting1.11 Limitations of Accounting1.12 Systems of Accounting1.13 Summary1.14 Keywords1.15 Self Assessment Questions1.16 Suggested Readings
21.0OBJECTIVEAfter reading this lesson, you should be able to1.1(a)Define accounting and trace the origin and growth of accounting.(b)Distinguish between book-keeping and accounting.(c)Explain the nature and objectives of accounting.(d)Discuss the branches, role and limitations of accounting.INTRODUCTIONAccounting has rightly been termed as the language of the business.The basic function of a language is to serve as a means of communicationAccounting also serves this function. It communicates the results of businessoperations to various parties who have some stake in the business viz., theproprietor, creditors, investors, Government and other agencies. Thoughaccounting is generally associated with business but it is not only business whichmakes use of accounting. Persons like housewives, Government and otherindividuals also make use of a accounting. For example, a housewife has to keep arecord of the money received and spent by her during a particular period. She canrecord her receipts of money on one page of her "household diary" while paymentsfor different items such as milk, food, clothing, house, education etc. on someother page or pages of her diary in a chronological order. Such a record will helpher in knowing about :(i)The sources from which she received cash and the purposes for which itwas utilised.(ii)Whether her receipts are more than her payments or vice-versa?(iii)The balance of cash in hand or deficit, if any at the end of a period.
3In case the housewife records her transactions regularly, she cancollect valuable information about the nature of her receipts and payments. Forexample, she can find out the total amount spent by her during a period (say ayear) on different items say milk, food, education, entertainment, etc. Similarlyshe can find the sources of her receipts such as salary of her husband, rent fromproperty, cash gifts from her relatives, etc. Thus, at the end of a period (say ayear) she can see for herself about her financial position i.e., what she owns andwhat she owes. This will help her in planning her future income and expenses (ormaking out a budget) to a great extent.The need for accounting is all the more great for a person who isrunning a business. He must know : (i) What he owns? (ii) What he owes? (iii)Whether he has earn a profit or suffered a loss on account of running a business?(iv) What is his financial position i.e. whether he will be in a position to meet allhis commitments in the near future or he is in the process of becoming a bankrupt.1.2ORIGIN AND GROWTH OF ACCOUNTINGAccounting is as old as money itself. However, the act of accountingwas not as developed as it is today because in the early stages of civilisation, thenumber of transactions to be recorded were so small that each businessman wasable to record and check for himself all his transactions. Accounting was practisedin India twenty three centuries ago as is clear from the book named "Arthashastra"written by Kautilya, King Chandragupta's minister. This book not only relates topolitics and economics, but also explain the art of proper keeping of accounts.However, the modern system of accounting based on the principles of double entrysystem owes it origin to Luco Pacioli who first published the principles of DoubleEntry System in 1494 at Venice in Italy. Thus, the art of accounting has beenpractised for centuries but it is only in the late thirties that the study of the subject'accounting' has been taken up seriously.
41.3MEANING OF ACCOUNTINGThe main purpose of accounting is to ascertain profit or loss duringa specified period, to show financial condition of the business on a particulardate and to have control over the firm's property. Such accounting records arerequired to be maintained to measure the income of the business and communicatethe information so that it may be used by managers, owners and other interestedparties. Accounting is a discipline which records, classifies, summarises andinterprets financial information about the activities of a concern so that intelligentdecisions can be made about the concern. The American Institute of CertifiedPublic Accountants has defined the Financial Accounting as "the art of recording,classifying and summarising in as significant manner and in terms of moneytransactions and events which in part, at least of a financial character, andinterpreting the results thereof". American Accounting Association definesaccounting as "the process of identifying, measuring, and communicating economicinformation to permit informed judgements and decisions by users of theinformation.From the above the following attributes of accounting emerge :(i)Recording : It is concerned with the recording of financial transactions inan orderly manner, soon after their occurrence In the proper books of accounts.(ii)Classifying : It Is concerned with the systematic analysis of the recordeddata so as to accumulate the transactions of similar type at one place. This functionis performed by maintaining the ledger in which different accounts are opened towhich related transactions are posted.(iii)Summarising : It is concerned with the preparation and presentation ofthe classified data in a manner useful to the users. This function involves the
5preparation of financial statements such as Income Statement, Balance Sheet,Statement of Changes in Financial Position, Statement of Cash Flow, Statementof Value Added.(iv)Interpreting : Nowadays, the aforesaid three functions are performed byelectronic data processing devices and the accountant has to concentrate mainlyon the interpretation aspects of accounting. The accountants should interpret thestatements in a manner useful to action. The accountant should explain not onlywhat has happened but also (a) why it happened, and (b) what is likely to happenunder specified conditions.1.4DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTINGBook-keeping is a part of accounting and is concerned with therecording of transactions which is often routine and clerical in nature, whereasaccounting performs other functions as well, viz., measurement andcommunication, besides recording. An accountant is required to have a muchhigher level of knowledge, conceptual understanding and analytical skill than isrequired of the book-keeper.An accountant designs the accounting system, supervises and checksthe work of the book-keeper, prepares the reports based on the recorded data andinterprets the reports. Nowadays, he is required to take part in matters ofmanagement, control and planning of economic resources.1.5DISTINCTION BETWEEN ACCOUNTING AND ACCOUNTANCYAlthough in practice Accountancy and Accounting are usedinterchangeably yet there is a thin line of demarcation between them. The wordAccountancy is used for the profession of accountants - who do the work ofaccounting and are knowledgeable persons. Accounting is concerned with
6recording all business transactions systematically and then arranging in the formof various accounts and financial statements. And it is a distinct discipline likeeconomics, physics, astronomy etc. The word accounting tries to explain the natureof the work of the accountants (professionals) and the word Accountancy refersto the profession these people adopt.1.6NATURE OF ACCOUNTINGThe various definitions and explanations of accounting has beenpropounded by different accounting experts from time to time and the followingaspects comprise the nature of accounting :i)Accounting as a service activityAccounting is a service activity. Its function is to provide quantitativeinformation, primarily financial in nature, about economic entities that is intendedto be useful in making economic decisions, in making reasoned choices amongalternative courses of action. It means that accounting collects financialinformation for the various users for taking decisions and tackling business issues.Accounting in itself cannot create wealth though, if it produces information whichis useful to others, it may assist in wealth creation and maintenance.(ii)Accounting as a professionAccounting is very much a profession. A profession is a career thatinvolve the acquiring of a specialised formal education before rendering anyservice. Accounting is a systematized body of knowledge developed with thedevelopment of trade and business over the past century. The accounting educationis being imparted to the examinees by national and international recognised thebodies like The Institute of Chartered Accountants of India (ICAI), New Delhi inIndia and American Institute of Certified Public Accountants (AICPA) in USA
7etc. The candidate must pass a vigorous examination in Accounting Theory,Accounting Practice, Auditing and Business Law. The members of the professionalbodies usually have their own associations or organisations, where in they arerequired to be enrolled compulsorily as Associate member of the Institute ofChartered Accountants (A.C.A.) and fellow of the Institute of CharteredAccountants (F.C.A.). In a way, accountancy as a profession has attained the staturecomparable with that of lawyer, medicine or architecture.( i i i ) Accounting as a social forceIn early days, accounting was only to serve the interest of the owners.Under the changing business environment the discipline of accounting and theaccountant both have to watch and protect the interests of other people who aredirectly or indirectly linked with the operation of modern business. The societyis composed of people as customer, shareholders, creditors and investors. Theaccounting information/data is to be used to solve the problems of the public atlarge such as determination and controlling of prices. Therefore, safeguarding ofpublic interest can better be facilitated with the help of proper, adequate andreliable accounting information and as a result of it the society at large is benefited.(iv)Accounting as a languageAccounting is rightly referred the "language of business". It is onemeans of reporting and communicating information about a business. As one hasto learn a new language to converse and communicate, so also accounting is to belearned and practised to communicate business events.A language and accounting have common features as regards rulesand symbols. Both are based and propounded on fundamental rules and symbols.In language these are known as grammatical rules and in accounting, these are
8termed as accounting rules. The expression, exhibition and presentation ofaccounting data such as a numerals and words and debits and credit are acceptedas symbols which are unique to the discipline of accounting.(v)Accounting as science or artScience is a systematised body of knowledge. It establishes arelationship of cause and effect in the various related phenomenon. It is also basedon some fundamental principles. Accounting has its own principles e.g. the doubleentry system, which explains that every transaction has two fold aspect i.e. debitand credit. It also lays down rules of journalising. So we can say that accountingis a science.Art requires a perfect knowledge, interest and experience to do awork efficiently. Art also teaches us how to do a work in the best possible way bymaking the best use of the available resources. Accounting is an art as it alsorequires knowledge, interest and experience to maintain the books of accounts ina systematic manner. Everybody cannot become a good accountant. It can beconcluded from the above discussion that accounting is an art as well as a science.(vi)Accounting as an information systemAccounting discipline will be the most useful one in the acquisitionof all the business knowledge in the near future. You will realise that people willbe constantly exposed to accounting information in their everyday life. Accountinginformation serves both profit-seeking business and non-profit organisations. Theaccounting system of a profit-seeking organisation is an information systemdesigned to provide relevant financial information on the resources of a businessand the effect of their use. Information is relevant and valuable if the decisionmakers can use it to evaluate the financial consequences of various alternatives.
9Accounting generally does not generate the basic information (raw financial data),rather the raw financial data result from the day to day transactions of the business.As an information system, accounting links an information sourceor transmitter (generally the accountant), a channel of communication (generallythe financial statements) and a set of receivers (external users).1.7OBJECTIVES OF ACCOUNTINGThe following are the main objectives of accounting :1.To keep systematic records : Accounting is done to keep a systematicrecord of financial transactions. In the absence of accounting there would havebeen terrific burden on human memory which in most cases would have beenimpossible to bear.2.To protect business properties : Accounting provides protection tobusiness properties from unjustified and unwarranted use. This is possible onaccount of accounting supplying the following information to the manager or theproprietor:(i)The amount of the proprietor's funds invested in the business.(ii)How much the business have to pay to others?(iii)How much the business has to recover from others?(iv)How much the business has in the form of (a) fixed assets, (b) ca
FINANCIAL ACCOUNTING : MEANING, NATURE AND ROLE OF ACCOUNTING STRUCTURE 1.0 Objective 1.1 Introduction 1.2 Origin and Growth of Accounting 1.3 Meaning of Accounting 1.4 Distinction between Book-Keeping and Accounting 1.5 Distinction between Accounting and Accountancy 1.6 Nature of Accounting 1.7 Objectives of Accounting 1.8 Users of Accounting Information 1.9 Branches of Accounting 1.10 Role .
Accounting Principles Generally Accepted Accounting Principles (GAAP) are the standard framework of guidelines for financial accounting/preparation of financial statements which has strong tight with the common accounting practices along with the accounting standards. Accounting principles are same as accounting concepts which discussed earlier.
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Unit 1: Introduction to Cost Accounting Notes LOVELY PROFESSIONAL UNIVERSITY 1 Unit 1: Introduction to Cost Accounting CONTENTS Objectives Introduction 1.1 Meaning and Defi nition of Cost Accounting 1.2 Scope and Use of Cost Accounting 1.3 Relationship between Financial Accounting and Cost Accounting 1.4 Role of Cost Accounting in Decision Making
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