Sanjoy 19
In this site, you get to learn all accountancy topics and all accounting
It is not possible for human beings to remember all events which occur at different times and at different places. But for solving day-to-day financial problems, knowledge of past and present economic activities become necessary. In other words, whenever any transaction involves any monetary dealings, 'counting'.The term accounting' has originated from the concept of 'counting'.The need of communicating information and presenting a clear picture of the financial transactions led to the emergence of Accounting.
American Institute of Certified Public Accountants (AICPA) formed the "Trueblood Committee" for ascertaining the objects of accounting. On the basis of the recommendations of this committee, the Financial Accounting Standards Board (FASB) of AICPA issued a Memorandum in 1974, accounting for which the objective of accounting may be classified as (A)Primary Objective and (B) Secondary Objective.
The need for accounting can be understood best if we consider the functions of accounting.Such a function of accounting may be broadly divided into: 1. Recording & Reporting 2. Stewardship Functions and 3. Managerial Functions.
Accounting analysis, identifies and classifies events and transactions. It arranges and prepares chronological records of financial transactions.
It helps to prepare the final results of an accounting period by finding out the net flow of wealth (Profit/Loss or Surplus/Deficit) and indicating the stock of wealth in the Balance Sheet. The results are communicated to interested parties like the owner, creditors, investors, government, etc.
There are three main branches of accounting. Accounting activities are very big, so accounting has been divided into different parts.
Traditionally, type or branches of accounting may be classified into three parts such as:
1.Financial Accounting.
2.Management Accounting.
3.Cost accounting .
However, at present, the branches of accounting has expanded to a large extent to include :
1.Human Resource Accounting.
2.Social Accounting
3.Forensic Accounting.
4.National Accounting.
5.Tax Accounting.
6.Green Accounting.
7.Creative Accounting.
Although 'Accounting' has been defined by the different scholarly ways, its nature of accounting is essentially described. Conceptually, accounting is an art of recording, classifying summarizing, and interpreting the financial result.
It defined as an art because it consists of certain creativity, value judgment, and skill which assist us to attain certain specific goals. The nature of Accounting mainly divided two views of point: 1. Structural viewpoint. 2. Functional viewpoint.
Accounting is now required in every case and accounting provides us with benefits. Such as, advantages of accounting, i.decision making, ii. replaces memory.
The advantages of accounting may be described as the viewpoint :
A.Advantages of accounting from the viewpoint of the owners and the management :
(i) Regular assessment of financial operation at the end of each accounting period.
(ii) Disclosure of financial results to interested parties.
(iii) Making comparative analysis among financial results of different period.
(iv) Locating areas of weakness and success.
(v) Arriving at correct policy and decision making.
B.Advantages of accounting from the viewpoint of Employees:
(i) Knowledge of annual financial results that helps to make appropriate claim for bonus, commission, etc.
(ii) Ascertaining their job securities.
C. Advantages of accounting From the viewpoint of Suppliers and Creditors:
(i) Knowledge of profitability of the concern against which they have claims.
(ii) knowledge of the solvency of the concern.
(iii) Arriving at correct decisions regarding discontinuing or renewing agreements with the concern.
There are many functions and advantages of accounting, you all know, but there some limitations of accounting. Today I will say the limitations of accounting. Such as limitations of accounting I. Accounting is not Fully Exact. ii.Unrealistic Information.
(i) It can express financial results in monetary terms only but has no tool to gauge other important aspects like human resource utilization, management efficiency, quality control, etc.
(ii) It makes a dogmatic approach to explain financial situations with some rigid ideas and concepts. In the changing scenario of socio-economic aspects, the results exhibited by accounting fails to reach the optimum level.
(iii) Accounting depends mostly on historical costs; conventional accounting fails to measure the impacts of inflation.
(iv) Comparison of accounting results does not become effective as the basic principles applied over years are static in nature. This especially affects the valuation zones, like inventory valuation, etc.
Limitations of Accounting :
i. Accounting is not Fully Exact.
ii.Accounting does not Indicate the Reliable Value.
iii. Accounting ignores the Qualitative Elements.
iv. Accounting Ignores Effect of Price Level Changes.
v. Accounting may lead to Window Dressing.
vi.Unrealistic Information.
vii. Recommendation of alternative methods.
viii. Accounting never shows the market value of assets or business:
Limitations of accounting are details discussed.
Although most of the transactions are recorded on the basis of evidence such as sale or purchase or receipt f cash, yet some estimates are also made for ascertaining profit or loss.ntages of accounting, you all know, but there some limitations of accounting. Such as, I. Accounting is not Fully Exact.
Bookkeeping is that branch of knowledge that tells us how to keep a record of the financial transaction. Book-keeping is a part of accounting that is concerned with the recording of financial transactions and events in the books of accounts.
It is a process by which a record of financial transactions is maintained. Thus, bookkeeping is concerned with:
i. Identifying financial transactions and events,
ii. Measuring them in terms of money,
iii. Recording the financial transactions and events as identified in the books of accounts, and
iv. Classifying recorded transactions and events or posting them into Ledger Accounts.
The need for recording such transaction arise because:
i.The financial information is required for the purposes of costing, budgeting, forecasting and planning, and
ii Book-keeping records are submitted to various government agencies like Income tax, value-added tax, and other taxing authorities for taxation purposes.
Most of us do maintain some kind of written record of our income and expenditure. The essential idea behind maintaining such a record is to show the correct position regarding income and expenditure.
such a record should be clear and systematic so that it can be easily understood. It should show that to whom, when, and what for a payment has been made. The need for maintaining a record of income and expenditure in a clear and systematic manner has given rise to the subject to book-keeping.
Accounting begins where book-keeping ends, bookkeeping, and accounting are complementary to each other difference between accounting and bookkeeping.
Difference between Accounting and Bookkeeping :
1. Scope:
Bookkeeping: Bookkeeping is concerned with, a. Identifying the transactions of financial nature, b. Measuring the identified transactions in terms of money, c. Recording the measured transactions, and d. Classifying them into ledger.
Accounting: Accounting is concerned with, a Summarising the classified transactions, b. Analysing and interpreting the summarised results, and c. Communicating the results to parties interested in them.
Bookkeeping: Book-keeping is the primary stage.
Accounting: It is the second stage. Accounting begins where book-keeping ends.
Bookkeeping: The main objective of Book-keeping is to maintain systematic records of transactions of financial nature.
Accounting: Its main objective is to ascertain the net results and financial position of the business and to communicate them to interested parties.
Bookkeeping: The Book-Keeping function is routine and clerical in nature.
Accounting: The Accounting function is analytical in nature.
5. Performs:
Bookkeeping: The Book-keeping function is performed by junior staff.
Accounting: The Accounting function is performed by senior staff.
Relationship with accounting and other disciplines. Accounting helps to other disciplines. such as Accounting and other disciplines bookkeeping and accounting, accounting and management, accounting and economics, etc
Accounting and bookkeeping related to recording. Accounting and management-related accounting helps business plans, decisions make, etc.
1.Book-Keeping and Accounting:
Book-Keeping is the primary recording of the day-to=day transactions of a business or concern and their subsequent recording or posting of the Ledger Accounting. The recordings are made in a systematic and orderly manner. Thus it is mainly confined to record keeping.
Eric L.Kohler defined it as " the process of analyzing, classifying and recording transactions in accordance with a preconceived plan, for the purpose of (a) providing a means by which an enterprise may be conducted in an orderly fashion, and (b) establishing a basis for recording and reporting the financial affairs of the enterprise and the results of the operation.
" Accounting emerges from Book-Keeping. It also implies an analysis and interpretation of the records maintained under Book-Keeping. It has a service function of providing quantitative information of financial nature that helps to arrive at economic decisions.
It shows the economic resources of the claims against a business enterprise. It measures the changes in the resource or claims. It helps to meet social and legal requirements as well.
Users of Accounting Information :
Users of accounting refer to those persons or organizations that focus on the information generated by the accounting system of an entity for their respective purposes. The users of accounting information can be broadly classified into two sets of users viz. Internal and External.
Users of Accounting Information :
The Users of Accounting Information two types.
Internal Users
i. Proprietors.
ii. Management
iii. Employees.
2.External Users:
i.Investors
ii.Lenders.
iii.Suppliers
iv.Customers
v.Government.
vi.Rivals.
vii.General Public.
viii.Research Scholars and Academicians.
ix.Security Analysts.
x.Regulatory Authorities.
Users of Accounting Information Internal Users :
They are interested to know the rate of return on the investment of long term solvency of the firm, the profit earning capacity of the firm and the growth potentiality. Accordingly, they can make sensible and judicial decisions regarding the investment or retiring of capital by way of accounting or acquiring or disposing shares on the basis of information available from the financial statement.
2.Management:
Management needs financial information for ensuring the survival and growth of the firm. On the basis of such information, they formulate plans, make policies, select strategy, allocate financial resources, and initiate control. Management also needs financial and operating information for the purpose of pinpointing the loopholes of the business and making effective investing, financial, operating, and strategic business decisions.
Two fundamental characteristics of financial statements are their truth and fairness. An auditor of the enterprise has to make a statement give a true and fair view. Besides the above two fundamental characteristics, there are other qualitative characteristics accounting information or features of accounting information.
Accounting information must have some qualitative Characteristics. These are the attributes that make the information available from financial statements useful to the users. It has four main qualitative Characteristics of Accounting Information: i. Reliability ii.Relevance iii.Understandability and iv. Comparability.
i. Reliability:
Reliability means that the accounting information should be such that it can be independently verifiable, information has the quality of reliability only when it is free material error and bias or subjectivity and can be relied upon by the users to represent faithfully.The other subsidiary features that make an information reliable are -
a. Faithful Representation:
To be reliable, information must represent faithfully the effects of transaction and other events that either purports to represent or could reasonably be expected to represent. It is necessary that the transactions should be accounted for and presented in accordance with their substance and economic reality and not merely their legal form. For instance, A Ltd.Co, has purchased equipment for official and the right, and the beneficial interest of the transaction has been passed but the documentation and legal formalities are pending. In such a case, the equipment should be shown in the Balance Sheet as own property although legal formalities in respect of the transfer of ownership has not yet made.
b. Neutrality:
To be reliable information contained in the financial statement must be neutral and impartial. On many occasions, judgment is required regarding various items of Financial Statement. E.g.Valuation of stock, computation of amount of doubtful debt. Thus, in these cases, in order to maintain neutrality, Judgement must be made without any business.
Introduction of Accounting Principles :
The main objectives of accounting to provide information about the financial performance of a business firm to its various interested groups such as owners, investors, creditors, customers, suppliers. Employees, etc, so that they can make important financial decisions. Thus, it is necessary that the language and terminology of accounting must be standardized, so that there may be uniformity in presenting accounting information.
It is obligatory that the accounting information must be reliable and comparable both at the level of inter-firm comparisons and inter-period comparisons.
