2. BOOK - KEEPING
Book keeping is the art and science of
recording,
classifying and
summarizing
business transactions in money or
money’s worth accurately and
systematically so that the
businessman may be able to know his
profit or loss during a specific period
and also his financial position on a
particular date.
3. ACCOUNTING
MEANING
Accounting extends far beyond the actual making of
records. Accounting is concerned with the use to
which these records are put, their analysis and
interpretation.
Accounting is a wider term and includes the recording,
classifying and summarizing of business transactions
in term of money, the preparation of financial
reports, the analysis and interpretation of these
reports for the information and guidance of
management
4. American Institute of Certified Public Accounts
{AICPA} has defined financial accounting as “ the art
of recording, classifying and summarizing in a
significant manner in terms of money transactions and
events which in a part, at least of a financial
character and interpreting the results thereof.”
5. IS ACCOUNTING A SCIENCE OR AN ART?
Accounting is both a science and an art.
Science is a systematical body of knowledge based on
certain principles
which have universal application.
establishes cause and effect relationship
based on observation, experiments
6. Art is the application of
• knowledge
• comprising of some accepted
theories,
• principles, rules, concepts and
conventions.
• the more we practice an art the
more
expert we become in it.
7. OBJECTS OF ACCOUNTING
1. To ascertain whether the business operations have been
profitable or not.
Accounting helps us to know whether a business has earned
profit or suffered loss during the accounting period. It will
give us an idea of efficiency of the business. To determine
profit or loss of the accounting period , a Trading and Profit
and Loss Account is prepared.
8. 2. To ascertain the financial position of the
business.
Balance Sheet or Position Statement is prepared
to give an idea of the financial position of the
business on a particular date. The financial
position of an enterprise is indicated by its
assets on a given date and its liabilities on that
date. Excess of assets over liabilities represent
the capital and is indicative of the financial
soundness of an enterprise.
9. 3. To generate information.
Accounting records generate such information
which may be helpful to various
persons in planning, control, evaluation of
performance and decision making.
10. FUNCTIONS OF ACCOUNTING
1. Systematic record of business transactions.
To keep systematic record of business
transactions, post them to the ledger and
ultimately to prepare the final accounts.
11. 2. Protecting the property of the business.
A complete record of the assets of the
concern is available without any difficulty
and therefore are not put to wrong use .
12. 3. Communicating results to interested parties
This function requires to supply the meaningful information about
the financial activities of the business to the various parties i.e.
owners, creditors, investors, employees, government, public,
research scholars and the managers at the right time.
13. 4. Compliance with legal requirements.
The accounting system must be such which
may be able to comply with the legal
requirements. Under various enactments a
businessman is required to file various
statements e.g. income tax return, return
for sale tax purposes etc.
14. USERS OF ACCOUNTING INFORMATION
Accounting is the language of the business. As the
primary aim of a language is to serve as a means of
communication, accounting is used to
communicate business information. The basic
objective of accounting is to provide information
which is useful for persons inside the organization
and for persons or groups outside the organization.
15. (I) External Users of Accounting Information
External users are those groups or persons who are
outside the organization for whom accounting function
is performed.
1. Investors
Those who are interested in investing money in an
organization are interested in knowing the
financial health of the organization to know how
safe the investment already made is and how safe
their proposed investment will be.
16. 2. Creditors
Creditors (i.e., suppliers of goods and services on
credit, bankers and other lenders of money) want
to know the financial position of a concern before
giving loans or granting credit. They want to be
sure that the concern will not experience difficulty
in making their payment in time , i.e. , liquid
position of the concern is satisfactory.
17. 3. Members of non-profit organizations
Members of non-profit organizations such as
schools, colleges, hospitals, clubs, charitable
institutions etc., need accounting information to
know how their contributed funds are being
utilized and to ascertain if the organization
deserves continued support or support should
be withdrawn keeping in view the bad
performance depicted by the accounting
information an diverted to another organization,
18. 4. Government
Central and state governments are interested in the
accounting information because they want to know
earnings or sales for a particular period for
purposes of taxation.
Government also need accounting information for
compiling statistics concerning business which, in
turn helps in compiling nationals accounts.
19. 4. Consumers
Consumers need accounting information for
establishing good accounting control so that of
production may be reduced with the resultant
reduction of the prices of goods they buy.
Sometimes, prices for some goods are fixed by the
government, so it needs accounting information to
fix reasonable prices so that consumers and
manufactures on their investment shown in the
accounting records.
20. (II) Internal Users of Accounting Information
1. Owners
The owners provide funds for the operations of a business
and they want to know whether their funds are being
properly used or not. They need accounting information
to know the profitability and the financial position of the
concern in which they have invested their funds.
21. 2. Management
Accounting information is an aid in this respect
because it helps a manager in planning, control,
decision making and appraising the performance of
the subordinates.
Actual performance of the employees can be compared
with the budgeted performance they were expected
to achieve and remedial action can be taken if the
actual performance is not up to the mark. Thus,
accounting information provides “The eyes and ears
and ears to management.”
22. 3. Employees
Employees are interested in the financial
position of a concern they serve
particularly when payment of bonus
depends upon the size of the profits
earned. They seek accounting
information to know that the bonus
being paid to them is correct.
23. Branches of Accounting
1. Financial accounting
The main purpose of this branch of accounting is to
ascertain profit or loss during a specific period, to
show financial position of the business on a particular
date and to have control over the firm’s property.
Such accounting records are used to impart useful
information to outsiders and to meet the legal
requirements.
24. 2. Cost Accounting
The main aim of cost accounting is to ascertain
cost relating to the various activities of the
business and to have control. The cost
accountant is required to assemble and interpret
cost data for the use of management is
controlling current operations and in planning for
the future.
25. 3. Management Accounting
It supplies the management significant information
in order to assist the management to discharge its
various functions such as planning, control,
evaluation of performance and decision making
etc.
26. Advantages of Accounting
1. Replacement of memory
In a large business it is very difficult for a
businessman to remember all the transactions.
Accounting provides records which will furnish
information as and when desired and thus it
replaces human memory.
27. 2. Evidence in court
Properly maintained accounts are often treated as
good evidence in the court to settle a dispute.
28. 3. Settlement of taxation liability
If accounts are properly maintained, it will be of great
assistance to the businessman in settling the income tax
and sale tax liability otherwise tax authorities may impose
any amount of tax which the businessman will have to
pay.
29. 4. Comparative study
It provides the facility of comparative study
of the various aspects of the business such
as profits, sales, expenses etc. with that of
previous year and helps the businessman to
locate significant factor leading to the
change, if any.
30. 5. Sale of business
If accounts are properly maintained, it helps
to ascertain the proper purchase price in
case the businessman is interested to sell
his business.
31. Limitations of Accounting
1. Records only monetary transactions
Accounting records only those transactions which
can be measured in monetary terms. Those
transactions which cannot be measured in
monetary terms as conflict between
production manager and marketing manager,
efficient management etc., may be very
important for a concern but not recorded in
the business books.
32. 2. Effect of price level changes not considered
Accounting transactions are recorded at cost in
the books. The effect of price level changes is
not brought into the books with the result that
comparison of the various years becomes
difficult. For example, the sales to total assets
in 2005 would be much higher than in 2000 due
to rising prices, fixed assets being shown at cost
and not at market price.
33. 3. Personal bias of accountant affects the accounting
statements
Accounting statements are influenced by the personal
judgment of the accountant. He may select any method
of depreciation, valuation of stock, amortization of fixed
assets, and treatment of deferred revenue expenditure.
Such judgment based on integrity and competency of
the accountant will definitely affect the preparation of
accounting statements.
34. 4.No realistic information
Accounting statements are prepared by
following basic concepts and conventions
which may not be realistic e.g. going
concern concept says business will continue
and assets are recorded at cost. Yet the
assets ay not realize their book value.
36. 6.Profit no real test of
managerial efficiency
Profit may be shown in excess by
manipulation of accounts by suppressing
costs like depreciation advertisement and
research and development.
37. 7. Historical in nature
Information supplied in P&L Account
and Balance Sheet is at the end of the
year. It only gives a view of what has
already happened.