What is Accounting?

Accounting is the Art Recording, Classifying, Summarizing and reporting Financial

Transactions on the basis of which we predict the future situation of a business.
Or
It is the language of Business.
It consists of two parts
1. book keeping
2. Predicting future situation of business.
It Deals with information that is needed on a day-to-day basis in order for the
organization to conduct its business. Employees need to get paid, sales need to be
tracked, the amounts owed to other organizations or individuals need to be tracked, the
amount of money the organization has needs to be monitored, the amounts that customers
owe the organization need to be checked, any inventory needs to be accounted for: the list
goes on and on. Operating information is what constitutes the greatest amount of
accounting information and it provides the basis for the other two types of accounting
information.
Financial Accounting Information
This is the information that is used by managers, shareholders, banks, creditors, the
government, the public, etc… to make decisions involving the organization and its
operations. Shareholders want information about what their investment is worth and
whether they should buy or sell shares, bankers and other creditors want to know whether
the organization has an ability to pay back money lent, managers want to know how the
company is doing compared to other companies. This type of information would be very
difficult to extract if every company used a different system for recording their financial
position. Financial accounting information is subject to a set of ground rules that dictate
how the information is reported and this ensures uniformity.
Managerial Accounting Information
In order for the managers of a company to make the best decisions for a company they
need to have specific information prepared. They use this information for three main
management functions: planning, implementation and control. Financial information is
used to set budgets, analyze different options on a cost basis, and modify plans as the
need arises, and control and monitor the work that is being done.
As you can see, accounting is a multifaceted system involving different people with
different needs and after analyzing the various uses and applications of accounting
information the American Accounting Association has come up with this definition: “the
process of identifying, measuring, and communicating economic information to permit
informed judgments and decisions by users of the information.”
Importance of Accounting Standards

Many times there are different ideas of different people in different organization about
recording and economic event they are all just at their own notion and speculations but
there has to be a system which shall justify the standard information recording system.
Because in this real world two contradicting realities cannot occur at the same time in
same place for example. 3 and 3 cannot be 33 and 6 at the same time so we need a system
of standards the current system of standards prevailing and pertaining in this world is
called Financial Accounting Standards (FAS) introduced maintained and updated due to
needs by Financial Accounting Standards Board (FASB).
Accounting has come to be based on specified rules or conventions called “principles.”
These principles provide general laws or rules that are used to guide accounting activity
and are called Generally Accepted Accounting Principles or GAAP for short. These
principles are established by the Financial Accounting Standards Board (FASB) which is
a nongovernmental agency funded by the accounting profession and contributions from
business organizations. While there is no legal obligation for companies to adhere to
GAAP, there are strong practical reasons to do so. From auditing to reporting earning to
the US Securities Exchange Commission to applying for a loan, there are very
compelling reasons for organizations to conform to the generally accepted standard.

CONCEPTS OF ACCOUNTING

Accounting is the language of business and it is used to communicate financial

information. In order for that information to make sense, accounting is based on 12
fundamental concepts. These fundamental concepts then form the basis for all of the
Generally Accepted Accounting Principles (GAAP). By using these concepts as the
foundation, readers of financial statements and other accounting information do not need
to make assumptions about what the numbers mean.
For instance, the difference between reading that a building has a value of Rs. 2000000
on the balance sheet and understanding what that Rs. 2000000 represents is huge. Can
you turn around and sell the building for Rs. 4000000? If you had to buy the building
today, would you pay Rs.2000000? Or, perhaps the original purchase price of the truck
was Rs.2000000. All of these problems lead to very different evaluations of the value of
that asset and how it contributes to the company’s financial situation.
 Marginal Costing
First of all let’s understand what do we mean by marginal costing then we will discuss its
essence in the managerial accounting.
Cost occurring on the very last item produced in a serial.
In relation to a given volume of output, additional output can normally be obtained at less
than proportionate cost because within limits, the aggregate of certain items of cost will
tend to remain fixed and only the aggregate of the remainder will tend to rise
proportionately with an increase in output. Conversely, a decrease in the volume of
output will normally be accompanied by less than proportionate fall in the aggregate cost.
The theory of marginal costing may, therefore, by understood in the following two steps:
If the volume of output increases, the cost per unit in normal circumstances reduces.
Conversely, if an output reduces, the cost per unit increases. If a factory produces 1000
units at a total cost of Rs.3, 000 and if by increasing the output by one unit the cost goes
up to Rs.3, 002, the marginal cost of additional output will be Rs..2.
If an increase in output is more than one, the total increase in cost divided by the total
increase in output will give the average marginal cost per unit. If, for example, the output
is increased to 1020 units from 1000 units and the total cost to produce these units is
Rs.1,045, the average marginal cost per unit is Rs.2.25. It can be described as follows:
additional cost-Rs.45 / additional units-20 =Rs.2.25.
The term ‘contribution’ mentioned in the formal definition is the term given to the
difference between Sales and Marginal cost. Thus

MARGINAL COST = VARIABLE COST DIRECT LABOUR+DIRECT MATERIAL+DIRECT

EXPENSE+VARIABLE OVERHEADS

CONTRIBUTION =SALES - MARGINAL COST

Roles played by a financial manager

• A finance manager should make future decisions and evaluate future values
exactly as they will have the effect in the future.
• a finance manager should be able to forecast future profit and make plans for
those profits in order to invest the money earned in other profitable projects.
• a finance manager should be able to perform all the business activities efficiently
and effectively
• A finance manger should be able to predict the cashflows and the condition of the
balance sheet on short term as well as long term basis.
• he must have a fully covering information about financial makets interest rates
etc.
• he must be eligible to maintain the capital of the firm.
• He should be aware and prepared to all the risks which are anticipated in near or
far future.

• He should be able to apply different techniques to optimize the net profit.

There are many other responsibilities lying on the shoulders of the finance
manager like managing debt, allocating assets properly etc.