Introduction

Definition of Accounting The definition is given by the American Institute of Certified Public Accountants clearly brings out the meaning and function of accounting. According to it 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 result thereof. Accounting is an art: It is related to analysis & interpretation of financial data which requires special knowledge, experience and judgment. Recording means systematically writing down the transactions and events in account books soon after their occurrences. . It records transaction in the terms of money: This provides a common measure of recording and increases the understanding of the state of affairs of the business. It records only those transaction and events, which are of financial character. If a transaction has no financial character then it will not be measured in the terms of money and will not be recorded. Classifying is the process of grouping transactions or entries of one nature at one place. This is done by opening accounts in a book ledger. Summarizing involves the preparation of reports & statements from the classified data (ledger) understandable and useful to management and other interested parties. This involves preparation of final accounts. Interpretation is the art of interpreting the results of operations to determine the financial position of the enterprise, the progress it has made and how well it is getting along. Accounting involves communication: The results of analysis and interpretation are communicated to management and to other interested parties. Objectives and Functions The primary or basic objective of accounting is to supply the necessary information to the users and analysts for taking futuristic decisions. Other objects and functions are: I) Providing necessary information about the financial activities to the interested parties. II) Providing necessary information about the efficiency, or otherwise, of the management regarding the proper utilization of the scarce resources. III) Providing necessary information for predictions (financial forecasting IV) Facilitates to evaluate the earning capacity of the firm by supplying a statement of financial position, a statement of periodical earning together with a statement of financial activities to the various interested person. V) Facilitates decisions regarding the changes in the manner of acquisition, utilizations, preservation and distribution of the scarce resources. VI) Facilitates decisions regarding replacement of fixed assets and expansion of the firm VII) Provides necessary data to the government for taking proper decisions relating to duties, taxes and price control etc. VIII) Devices remedial measure for the deviations between the actual and budgeted performance. IX) Provides necessary data and information to the managers for internal reporting and formulation of overall policies. Branches of Accounting 1. Financial Accounting: Accounting deals with recording, classifying and summarizing business events, which have already occurred and is, therefore, historical in nature. Thats why it is called Historical Accounting or Post-mortem Accounting or more popularly financial Accounting. Its aim is to develop information about income and financial position on the basis of business events, which have taken place during a period of time. Information provided by financial accounting system about financial results and financial position on historical basis is significant but not sufficient for smooth, orderly and efficient running of the business. Management needs more information for planning and control of the business activities. The answer lays in two more forms of accounting namely, Cost Accounting and Management Accounting. 2. Cost Accounting: It deals with detailed study of cost with reference to cost ascertainment, cost reduction and cost control. The emphasis is no historical costs as well as future decision-making costs.

3. Management Accounting: It provides information to the management not only about cost but also about revenue, profits, investments etc. to enable managers to discharge their functions of managing the business more efficiently and effectively. Thus, it provides required database to managers to plan and control the activities of business enterprises. Distinction Basis Sco pe between Book-keeping and Accounting Book-keeping Accounting (a) Identifying the Accounting in addition to Book-keeping involves transactions, summarizing the classified transactions, analyzing (b) Measuring the identified the summarized results, interpreting the analyzed transaction, results and communicating the Interpreted (c) Recording the measured information to the interested parties. classifying the recorded transactions Book-keeping is primary Accounting is the secondary stage. It starts where stage. Bookkeeping ends. The basic objective of The basic objective of accounting is to ascertain Booking-keeping is to net results of operations and financial position maintain systematic and to communicate information to the interested records of financial parties. transactions. Junior staff. Senior staff. The Book-keeper is not required to have higher level of knowledge than that of an accountant. Book-keeper may or may not possess analytical skill. The job of a book-keeper is often routine and clerical in nature. It does not cover designing of accounts system. The Book-keeper does not supervise and check the work of an accountant. The accountant is required to have higher level of knowledge than that of Book-keeper The accountant is required to possess analytical is nature. The job of an accountant is analytical is nature. It covers designing of accounting system.

Stage Objectiv e

Who Performs Knowled ge Level Analytic al Skill Nature of Job Designin g of Accounti ng System Supervis ion and Checking

An accountant supervises and checks The work of a bookkeeper.

Interested persons in accounting information 1. Owner(s): This refers to a person or group of persons who have supplied capital for running the business. This refers to an individual in case of a proprietor, partners in case of a partnership firm and shareholders in case of a joint stock company. Owners need the accounting information to know whether their business is growing or falling, they are in profit or loss so that they can take necessary actions. 2. Managers: For managing business profitably, information about financial results and financial position is needed by management. By providing this information, accounting helps managers in efficient and smooth running of a business enterprise. 3. Investors: Prospective investors would like to know about the past performance of the business enterprise before making investment in that concern. By analyzing historical information provided by accounting records, they can arrive at a decision about the expected return and the risk involved in investing in a particular business enterprise. 4. Creditors and Financial Institutions: Whosoever is extending credit or loan to a business enterprise, would like to have information about its repaying capacity, credit

worthiness etc. Analyzing and interpreting the financial statements of the business enterprise can obtain the required information. 5. Employees: Employees are concerned about job security and future prospects. Both of these are intimately related with the performance of the business enterprise. Thus by analyzing financial statements they can draw conclusions about their job-security and future prospects. 6. Government: Government policies relating to taxation, providing subsidies etc. are guided by relevance of the industry in the economic development of the country and the past performance of the industry. Information about past performance is provided by the accounting system. Collection of taxes is also based on accounting records. 7. Researchers: Researchers need financial information for testing hypothesis and development of theories and models. The required information is provided by accounting system. 8. Customers: Customers who have developed loyalties to a business are certainly interested in the continuance of the business. They certainly want to know about the future directions of the enterprise with which they are associating themselves. The way to information about the enterprise is through their financial statements. 9. Public: An enterprise affects the public at large in many ways such as a provider of employment to a number of persons, being a customer to many suppliers, a provider of amenities in the locality or a cause of concern to the public due to pollution etc. Hence, public at large is interested in knowing the future directions of enterprise and the only window to peep inside the enterprise is their financial statements. Above-mentioned list of group of users of accounting information is not exhaustive. Anyone having an interest in the business enterprise can use information for decisionmaking. Advantages of Accounting The advantages of accounting are as follows: 1. Facilitates to replace memory: Accounting facilitates to replace human memory by maintaining compete record of financial transactions. Human memory is limited by its very nature. Accounting helps to overcome this limitation. 2. Facilitates to comply with legal requirements: Accounting facilitates to comply with legal require an enterprise to maintain books of accounts. For example, Sec. 209 of The Companies Act 1956, requires a company to maintain proper books of accounts on accrual basis, Sec 44AA of The Income Tax 1961 requires certain persons to maintain specified books of accounts. 3. Facilitates to ascertain net result of operations: Accounting facilitates to ascertain net results of operations by preparing Income Statement. 4. Facilitates to ascertain financial position: Accounting facilitates to ascertain financial position by preparing Position Statement. 5. Facilitates the users to take decisions: Accounting facilitates the users (i.e., Shortterm Creditors, Long-term Creditors, Present Investors, Potential Investors, Employee groups, Management, General Public, Tax Authorities) to take decisions by communicating accounting information to them. 6. Facilitates a comparative study: Accounting facilitates a comparative study in the following four ways: (i) Comparison of actual figures with standard or budgeted figures for the same period and the same firm; (ii) Comparison of actual figures of one period with those of another period for the same firm (i.e. Intra-firm Comparison); (iii) Comparison of actual figures of one firm with those of another standard firm belonging to the same industry (i.e. Inter-firm Comparison); and (iv) Comparison of actual figures of one firm with those of industry to which the firm belong (i.e. Pattern Comparison). 7. Assist the management: Accounting assists the management in planning and controlling business activities and in taking decisions. For example, Projected Cash Flow Statement facilitates the management to know future receipts and payments and to take decision regarding anticipated surplus or shortage of funds.

8. Facilitates control over assets: Accounting facilitates control over assets by providing information regarding Cash Balance, Bank Balance, Debtors, Fixed Assets, Stock etc. 9. Facilitates the settlement of tax liability: Accounting facilitates the settlement of tax liability with the authorities by maintaining proper books of accounts in systematic manner. 10. Facilitates the ascertainment of value of business: Accounting facilitates the ascertainment of value of business in case of transfer of business to another entity. 11. Facilitates raising loans: Accounting facilitates raising loans from lenders by proving them historical and projected financial statements. 12. Acts as legal evidence: Proper books of accounts maintained in systematic manner act as legal evidence in case of disputes. Basic Terms in Accounting 1. Capital: Generally refers to the amount invested in an enterprise by its owners e.g., paid up share capital in a corporate enterprise. It is also used to refer to the interest of owners in the assets of an enterprise. 2. Assets: Tangible objects or intangible rights owned by an enterprise and carrying probable future benefits. 3. Liability: The financial obligation of an enterprise other than owners funds. 4. Revenue: The gross inflow of cash, receivables or other consideration arising in the course of ordinary activities of an enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charge made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. It excludes amounts collected on behalf of third parties such as certain taxes. In an agency relationship, the revenue is the amount of commission and not the gross inflows of cash, receivables or other consideration. 5. Cost of Goods Sold: The cost of goods sold during an accounting period. In manufacturing operatio0ns, it includes (i) cost of materials; (ii) labour and factory overheads; selling and administrative expenses are normally excluded. 6. Profit: A general term for the excess of revenue over related cost. When the result of this computation is negative, it is referred to as loss. 7. Expenditure: Incurring a liability, disbursement of cash or transfer of property for the purpose of obtaining assets, goods or services. 8. Expenses: The cost relating to the operation of an accounting period or the revenue eared during the period or the benefit of which do not extend that period. 9. Deferred Expenditure: Expenditure for which payment has been made or a liability incurred but which is carried forward on the presumption that it will be benefit over a subsequent period or periods. This is also referred to as deferred revenue expenditure. 10. Sales Turnover: The aggregate amount for which sales are affected or services rendered by an enterprise. The terms gross turnover and net turnover (or gross sales and net sales) are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts. 11. Inventory: Tangible property held for sale in the ordinary course of business, or in the process of the production for such sale, or the consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery spares. 12. Accumulated Depreciation: The total to date of the periodic depreciation charges on depreciable assets. 13. Profit and Loss Statement: A financial statement which presents the revenue and expenses of an enterprise for an accounting period and shows the excess of revenue over expenses (or vice versa). It is also known as profit and loss account. 14. Appropriation Account: An account sometimes included as a separate section of the profit and loss statement showing application of profits towards dividends, reserves, etc. 15. Prior Period Item: A material change or credit which arises in the current period as a result or errors or omissions in the preparation of the financial statements of one or more prior periods.

16. Accounting Policies: The specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. 17. Cash Basis of Accounting: The method of recording transactions by which revenues and costs and assets and liabilities are reflected in the accounts in the period in which actual receipts or actual payments are made. 18. Accrual Basis of Accounting: The method of recording transactions by which revenue, costs, assets and liabilities are reflected in the accounts in the period in which they accrue. The accrual basis of accounting includes considerations relating to deferrals, allocations, depreciation and amortization. This basis is also referred to as mercantile basis of accounting. exhibits its assets, liabilities, capital, reserves and other account balances at their respective book value. 19. Balance Sheet: A statement of the financial position of an enterprise as at a given date, 21. Goodwill: An intangible asset arising from business connection or trade name or reputation of an enterprise. 22. Sundry Creditor: Amount owed by an enterprise on account of goods purchased or services received or in respect of contractual obligations. Also termed as trade creditor or account payable. 24. Contingent Asset: An asset the existence, ownership or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events. 25. Contingent Liability: An obligation relating to an existing condition or situation which may arise in future depending on the occurrence or non-occurrence of one or more uncertain future events.

Accounting is the language of business through which the business house communicates with the outside world. Over a period the nature of the accounting function has changed. Initially more thrust was on book-keeping that is maintenance of records manually. However, today, where computerized accounting softwares are used, role of accountants is more towards analysis and interpretation than the mere maintenance of the data. The accounting information is useful not only for the owners and managements but also useful to creditors, employees, government and prospective investors. The main objective of the accounting is to reflect the true and fair picture of profitability and financial position, which helps management to take corrective actions and future decisions.