MEANING AND DEFINITIONS OF ACCOUNTING
The meaning of accounting is broader than that of book-keeping. Accounting includes not only book-keeping but also other activities. It records, classifies, and summarizes the financial transactions of a business with a view to ascertaining its profit or loss for the period and its financial position at the end of the period. Besides, it interprets and communicates information about the financial position of the business. Thus, accounting can be defined as a process of recording, classifying, and summarizing financial transactions of a business in such a manner that the results of its operations and financial position can be ascertained at the end of a given period, and communicating them to a various user. Some famous definitions of accounting are as follows:
The American Institute of Certified Public Accountants (AICPA): ” 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 results thereof “.
R. N. Anthony: “An accounting system is a means of collecting, summarizing, analyzing and reporting, in monetary terms, information about the business“.
R. Lewis and Ian Gillespie: “Accounting may be seen as consisting of recording, classification, presentation, and interpretation of financial information“.
Smith and Ashbourne:” Accounting is a science of recording and classifying transactions and events, primarily of a financial character and the art of making significant summaries, analysis, and interpretations of those transactions and events and communicating the results to persons who must make decisions or form judgments “.
It is obvious from the above definitions that accounting is a broader term than book-keeping. The recording and classifying aspects of accounting are fairly routine work and are related to book-keeping. However, the core aspects of accounting include summarization, presentation, interpretation, and communication of the information provided by financial records. In simple words, thus, accounting is the process of recording, classifying, summarizing, and interpreting the financial information of a business for taking financial decisions.
THINGS TO REMEMBER (TTR)
Accounting can be defined as the process of recording, classifying, and summarizing financial transactions of a business in such a manner that the results of its operations and its financial position can be ascertained at the end of a given period, and interpreting and communicating them to the users.
FEATURES OF ACCOUNTING
The following are the salient features of accounting:
Science and art:
Accounting is a science as well as an art. It is a science because it represents a systematic body of knowledge is based on a set of principles. It is also an art because it involves practical work in which one can fully exercise judgment.
Process:
Accounting is a process of systematic recording, classifying financial transactions, and interpreting financial information for the users.
Financial information:
Accounting déals only with financial information. Any information, which is not expressed in monetary terms, is not considered in accounting.
Information system:
Accounting is an information system. It uses financial transactions as inputs, processes them, and provides financial information as to its output to the decision-maker.
Function:
Accounting is a function. It, therefore, identifies and gathers financial transactions, classifies and summarizes them, interprets and reports their results to the users.
THINGS TO REMEMBER (TTR)
The main features of accounting are:
- Science and art
- Process
- Financial information
- Information system
- Function
OBJECTIVES OF ACCOUNTING
The major objectives of accounting are as follows:
- To maintain records: Since human memory is limited, it is very difficult for a person to remember all financial transactions that a business performs. Therefore, accounting maintains permanent records of all financial transactions of a business in books and computers based on a set of rules.
- To ascertain profit or loss: A business has the prime motive of earning profits. Therefore, accounting ascertains whether the business has earned a profit or suffered a loss by preparing a profit and loss account at the end of a period.
- To show a business’s financial position: Besides its profit or loss, the business also needs to know about its financial position at the end of a period. Therefore, accounting shows the financial position of the business by preparing a statement called the balance sheet. The balance sheet is a statement of the capital, liabilities, and assets of the business.
- To communicate information: Financial information is essential to its users for making financial decisions. Therefore, accounting communicates the information of operating results and financial position of the business to different users for their decision-making purposes.
- To determine tax amount: Every business has to pay taxes of different kinds to the government. Therefore, accounting provides financial information to the tax office, which helps in determining the amount of tax liability.
FUNCTIONS OF ACCOUNTING
The main functions of accounting are as follows:
- Maintaining complete and systematic records: The first function of accounting is to maintain permanent, complete, and systematic records of all financial transactions of a business. Such records are maintained in the books and electronic devices by using a given set of rules.
- Finding out the results of business operations: Another important function of accounting is to find out the results of business operations and the business financial position. Such results of business operations are obtained by preparing a profit and loss account and the balance sheet.
- Communicating accounting information: Communicating information to the users is yet another important function of accounting. There are different users of accounting information such as owners, managers, creditors, employees, consumers, and the government. They need such information for their own purposes. Accounting communicates the information through annual accounting reports.
- Complying with legal requirements: Some businesses such as joint-stock companies are required to submit their accounting reports prepared under the double-entry system by considering the Generally Accepted Accounting Principles (GAAP). Therefore, an important function of accounting is to comply with legal requirements,
- Protecting business properties: A business uses different kinds of assets and properties for its purposes and they need protection from misuse. Therefore, one important function of accounting is to protect the assets and properties by devising such records and procedures that easily locate the assets and the person who uses them.
THINGS TO REMEMBER (TTR)
Tho main functions of accounting are:
- Maintaining complete and systematic records
- Finding out results of business operations
- Communicating accounting information
- Complying with legal requirements
- Protecting business’ properties
SCOPE OF ACCOUNTING
The scope implies the field or area which accounting covers. Since accounting is pervasive in all human economic activities, the field of accounting is very wide. The scope of accounting is composed of the following:
- Business: Business is the largest field of accounting activity. Accounting is used in all businesses irrespective of their nature, kind, and size. Different branches of accounting such as financial accounting, cost accounting, management accounting, international accounting, and human resource accounting may be used in a business according to its needs.
- Government: The government is another important field of accounting activity. Accounting is used in all government offices such as the central and operating level offices. The branch of accounting used in government organizations is called government accounting.
- Non-governmental organizations: Like government organizations, non-profit organizations and non-governmental organizations (NGOs) play an important role in the development of a nation. Accounting is invariably used in these organizations. The system of accounting used, in these organizations is called funds accounting.
- Profession: A profession is a human economic activity that needs specialized knowledge and skills. Examples of professions are teaching, legal, medical, accounting, and engineering professions. The profession also comprises an important field of accounting activity.
- Individuals: Individuals also perform economic activities to earn their livelihood. Therefore, some form of accounting is also carried out by them to draw financial information for taking some personal financial decisions.
THINGS TO REMEMBER (TTR)
The scope of accounting is composed of the following:
- Business
- Government
- Non-Profit making organizations and NGOs
- Profession
- Individuals
