3. DEFINITIONS OF ACCOUNTING
Accounting is the systematic recorded presentation of
the financial activities of the business/ Enterprise.
oAccounting is an art of identifying, classifying,
recording, summarizing and interpreting business
transactions of financial nature.
o Smith and Ashburne, “Accounting is a means of
measuring and reporting the results of economic
activities.”
o In the opinion of Bierman and Derbin, “Accounting may
be defined as the identifying, measuring, recording and
communicating of financial information.”
4. HISTORY OF ACCOUNTING
The role of accounting has changed from that of a mere record keeping during
the 1st decade of 20th century to the present stage, when it is accepted as
information system and decision making activity.
The term accounting is becoming gradually broader. It is evident from definition
of accounting arranged in historical order:
i. 1941 The American Institute of Certified Public Accountants (AICPA) defined
accounting as:
“ The art of recording, classifying and summarising 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 result thereof.”
ii. 1966 The American Accounting Association (AAA) defined accounting as :
“ The process of identifying, measuring and communicating economic
information to permit information to permit informed judgements and
decisions by uses of the information.”
iii. 1970 Accounting Principles Board (ABP) and AICPA states :
“The function of Accounting is t provide quantitative information primarily
financial in nature, about economic entities, that is intended to be useful in
making economic decisions.”
5. Communication
Analysing and interpreting the business transactions
Summarizing the business transactions
Recording the business transactions
Measurement in terms(Rupees)
Classification of the business transaction
Identification to the economics
ACCOUNTING PROCESS
6. FUNCTIONS OF ACCOUNTING
IN BREIF
As we know accountancy is the numerative expression of
accounting events, so it generates data for its users. Accounting
data performs the following functions:
1. Measurement of past performance.
Accounting keeps proper record of all economic events, prepares
ledger accounts and reports the result of past performance. Here,
accounting period is supposed to consist of 12 months. We
record and report only those economic events, which have
already occurred. We do not record possibilities and
expectations.
2. Forecasting future performance.
Accounting data of the past is also used to forecast the future
possibilities and performance. A rough estimate of future
production, sales, profit and value of assets are made on the
basis of accounting information.
7. 3. Helping decisions making.
The management is required to formulate future policies and take
important decisions. The decision making process needs accounting
information as source documents. The various users of accounting
information use accounting data for making their own decisions,
concerning their interest.
4. Controlling of performance.
The actual performance of the business is compared with the
business is compared with the desired performance and deviations,
if any are ascertained. We identify the areas of weakness and apply
remedial measures.
5. Honouring legal commitments of the business.
Accounting data must be prepared and presented to honour the
legal formalities of various acts and government legislations, such as
provisions of Income Tax Act, Sales Tax Act, Partnership and
Companies Acts etc.
10. Internal Users
1.Owners:- Owners provide funds for the operations of a
business and they want to know about profits and losses of the
business, their amount of capital, amount of current and fixed
assets, debtors and creditors of the profitability of the business.
2. Managers:- Managers need accounting information for the
efficient management of the business.
For Example,
What is the cost of production? What should be the selling price of
the product? Whether the sales are increasing or decreasing and
appraising the performance of the subordinates etc.
Ail such informations are provided by the accounts department.
3. Employees:- Employees are interested to know the profitability
and growth of the business to assess the ability of business to pay
more wages, bonus and other monetary incentives.
11. EXTERNAL USERS
1.Investors: Investors need accounting information about the profitability and
financial position of the business. With the help of accounting information they
evaluate the past performance and future prospectus of the business. Thus,
investors decisions are dependent upon accounting information included in the
financial statements.
2. Creditors/ Suppliers: Creditors/Suppliers are the persons who have sold
the goods to the business on credit. They want to be sure that their payments
are secure or not. They are more interested in the information relating to current
assets and current liabilities.
3. Banks: Banks want to judge the profit earning capacity and the financial
position of the business, before granting a loan to the business. Such
information are provided by accounting deptt.
4. Customers: Customers have an interest in information about the
continuation of an enterprise, especially when they have established a long-term
involvement with or are dependent on the enterprise.
5. Government: Government is interested in accounting information on
account of assessment of income tax, sales tax, excise duty etc. thus,
Government wants that the accounts are maintained in proper manner.
13. Difference Between Financial Accounting And Managerial Accounting
Financial Accounting
Reports to those outside the organization owners, lenders, tax authorities and
regulators.
Managerial Accounting
Reports to those inside the organization for planning, directing and motivating,
controlling and performance evaluation.
Financial Accounting
Emphasis is on summaries of financial consequences of past activities.
Managerial Accounting
Emphasis is on decisions affecting the future.
Financial Accounting
Objectivity and verifiability of data are emphasized.
Managerial Accounting
Relevance of items relating to decision making is emphasized.
14. Financial Accounting
Precision of information is required.
Managerial Accounting
Timeliness of information is required.
Financial Accounting
Only summarized data for the entire organization is prepared.
Managerial Accounting
Detailed segment reports about departments, products, customers, and
employees are prepared.
Financial Accounting
Must follow Generally Accepted Accounting Principles (GAAP).
Managerial Accounting
Need not follow Generally Accepted Accounting Principles (GAAP).
Financial Accounting
Mandatory for external reports.
Managerial Accounting
Not mandatory.
15. Management Accounting
Purpose:
To provide managers with
information, useful in
planning and controlling
business operations, and
making decisions.
Types of Reports:
Many types of reports
depending upon nature of
the business and specific
information needs of
management
Financial Accounting
Purpose:
To provide a wide variety of
decision makers with useful
information about the
financial position and
operating results of a
business entity.
Types of Reports:
Financial statements, income
tax returns and special
reports.( loan applications
and reports to regulatory
agencies).
16. Management Accounting
Standards for Presentation:
No specific rules:
whatever the
information is most relevant
to the needs of management.
Reporting Entity:
A subdivision of the business.
Time Periods Covered:
Any period year, quarter
month,week,day,even a work-
shift. Some reports are
historical in nature other focus
on estimates of results
expected in future.
Financial Accounting
Standards for Presentation:
Generally involve accepted
accounting principles in
income tax returns, tax
regulations.
Reporting Entity:
The company viewed as a
whole.
Time Periods Covered:
Usually a year, quarter or
month. Most reports focus
on completed periods.
17. Management Accounting
Users of Information:
Management (different
reports to different
managers).
Managerial accounting
reports usually are not
distributed to outsiders.
Financial Accounting
Users of Information:
Outsiders as well as
managers.
Income tax returns normally
go only to tax authorities.