meaning of accounting:- The Committee on Terminology set up by the American Institute of Certified Public Accountants formulated the following definition of accounting in 1961:
“Accounting is 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.”
“The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of accounts.”
In 1970, the Accounting Principles Board (APB) of the American Institute of Certified Public Accountants (AICPA) enumerated the functions of accounting as follows:“The function of accounting is to provide quantitative information, primarily of financial nature, about economic entities, that is needed to be useful in making economic decisions.”
Thus, accounting may be defined as the process of recording, classifying, summarising, analyzing and interpreting financial transactions and communicating the results thereof to the persons interested in such information.
Procedural aspects of Accounting
On the basis of the above definitions, the procedure of accounting can be basically divided into two parts:
- Generating financial information and
- Using the financial information.
Classifying
Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place so as to put information in compact and usable form. The book containing classified information is called “Ledger”. This book contains on different pages, individual account heads under which, all financial transactions of similar nature are collected.
Summarising
It is concerned with the preparation and presentation of the classified data in a manner useful to the internal as well as the external users of financial statements. This process leads to the preparation of the financial statements.
Analysing
The term ‘Analysis’ means methodical classification of the data given in the financial statements. The figures given in the financial statements will not help anyone unless they are in a simplified form. For example, all items relating to fixed assets are put at one place while all items relating to current assets are put at another place. It is concerned with the establishment of a relationship between the items of the Profit and Loss Account and Balance Sheet i.e. it provides the basis for interpretation. Students will learn this aspect of financial statements in the later stages of the Chartered Accountancy Course.
Interpreting
This is the final function of accounting. It is concerned with explaining the meaning and significance of the relationship as established by the analysis of accounting data. The recorded financial data is analyzed and interpreted in a manner that will enable the end-users to make a meaningful judgment about the financial condition and profitability of the business operations. The financial statement should explain not only what had happened but also why it happened and what is likely to happen under specified conditions.
Communicating
It is concerned with the transmission of summarised, analyzed, and interpreted information to the end-users to enable them to make rational decisions. This is done through the preparation and distribution of accounting reports, which include besides the usual profit and loss account and the balance sheet, additional information in the form of accounting ratios, graphs, diagrams, fund flow statements, etc. Students will learn this aspect of financial statements in the later stages of the Chartered Accountancy Course.
Using the Financial Information
There are certain users of accounts. Earlier it was viewed that accounting is meant for the proprietor or owner of the business, but changing social relationships diluted the earlier thinking.
It is now believed that besides the owner or the management of the business enterprise, users of accounts include the investors, employees, lenders, suppliers, customers, government and other agencies and the public at large.
OBJECTIVES OF ACCOUNTING
The objectives of accounting can be given as follows:
Systematic recording of transactions
The basic objective of accounting is to systematically record the financial aspects of business transactions i.e. book-keeping. These recorded transactions are later on classified and summarized logically for the preparation of financial statements and for their analysis and interpretation.
Ascertainment of results of above-recorded transactions
An accountant prepares profit and loss accounts to know the results of business operations for a particular period of time. If revenue exceeds expenses then it is said that the business is running profitably but if expenses exceed revenue then it can be said that the business is running under loss. The profit and loss account helps the management and different stakeholders in taking rational decisions. For example, if the business is not proved to be remunerative or profitable, the cause of such a state of affairs can be investigated by the management for taking remedial steps.
Ascertainment of the financial position of the business
The businessman is not only interested in knowing the results of the business in terms of profits or loss for a particular period but is also anxious to know what he owes (liability) to outsiders and what he owns (assets) on a certain date. To know this, an accountant prepares a financial position statement popularly known as a Balance Sheet. The balance sheet is a statement of assets and liabilities of the business at a particular point of time and helps in ascertaining the financial health of the business.
Providing information to the users for rational decision-making
Accounting as a ‘language of business’ communicates the financial results of an enterprise to various stakeholders by means of financial statements. Accounting aims to meet the information needs of the decision-makers and helps them in rationaldecision-making.
To know the solvency position
By preparing the balance sheet, management not only reveals what is owned and owed by the enterprise, but also it gives the information regarding concern’s ability to meet its liabilities in the short run (liquidity position) and also in the long-run (solvency position) as and when they fall due.
FUNCTIONS OF ACCOUNTING
The main functions of accounting are as follows:
Measurement
Accounting measures the past performance of the business entity and depicts its current financial position.
Forecasting
Accounting helps in forecasting future performance and the financial position of the enterprise using past data and analysing trends.
Decision-making
Accounting provides relevant information to the users of accounts to aid rational decision-making.
Comparison & Evaluation
Accounting assesses performance achieved in relation to targets and discloses information regarding accounting policies and contingent liabilities which play an important role in predicting, comparing and evaluating the financial results.
Control
Accounting also identifies weaknesses of the operational system and provides feedback regarding the effectiveness of measures adopted to check such weaknesses.
Government Regulation and Taxation: Accounting provides the necessary information to the government to exercise control on the entity as well as in the collection of tax revenues.
SUMMARY
“Accounting is 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.”
Accounting procedure can be basically divided into two parts:
Generating financial information and
- Using the financial information.
- The objectives of accounting can be given as follows:
Systematic recording of transactions
Ascertainment of results of above-recorded transactions
- Ascertainment of the financial position of the business
- Providing information to the users for rational decision-making
- To know the solvency position
The main functions of accounting are as follows:
- Measurement
- Forecasting
- Decision-making
- Comparison & Evaluation
- Control
- Government Regulation and Taxation
Ascertainment of Financial Effect on the Business
The various sub-fields of accounting are:
(i) Financial Accounting (ii) Management Accounting
(iii) Cost Accounting (iv) Social Responsibility Accounting
(v) Human Resource Accounting
The various users of accounting information:
(i) Investors (ii) Employees
(iii) Lenders (iv) Suppliers and Creditors
(v) Customers (vi) Government and their agencies
(vii) Public (viii) Management
Accounting is closely related to several other disciplines and thus to acquire good knowledge in accounting one should be conversant with the relevant portions of such disciplines.
An accountant with his education, training, analytical mind, and experience is best qualified to provide multiple need-based services to the ever-growing society. The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial lay-out, company legislation, and procedures but they can delve deep into the fields relating to financial policies, budgetary policies, and even economic principles.
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