2. 2
Learning Objectives
This Chapter would enable you to understand:
Definitions ofAccounting
Meaning ofAccounting
Attributes ofAccounting
Accounting Process
Branches ofAccounting
Book Keeping,Accounting andAccountancy
Difference between Book Keeping andAccounting
3. 3
Learning Objectives
Objectives ofAccounting
Functions ofAccounting
Advantages ofAccounting
Limitations ofAccounting
Accounting Information and its' Types
Users of Accounting Information
Systems ofAccounting
4. 4
DEFINITION OF ACCOUNTING
"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
results thereof."
-American Institute of Certified PublicAccountants
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DEFINITION OF ACCOUNTING
"Accounting is the science of recording and
classifying business 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 judgment."
-Smith andAshburne
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DEFINITION OF ACCOUNTING
"Accounting is the process of identifying, measuring
and communicating economic information to permit
informed judgments and decisions by users of the
information."
-AmericanAccountingAssociation
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Meaning of Accounting
Thus, accounting is a process of
collecting,
recording,
summarising and
communicating financial information to the users
for decision-making.
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ATTRIBUTES (CHARACTERISTICS) OF ACCOUNTING
The definitions of accounting bring to light the
following attributes ofAccounting:
1. Identification of Financial Transactions and
Events
2. Measuring the Identified Transactions
3. Recording
4. Classifying
5. Summarising
6. Analysis and Interpretation
7. Communicating
9. 9
Financial Transactions or
Events
Recording
Journal
1. Cash Book
2. Purchase Book
3. Sales Book
4. Purchases Return Book
5. Sales Return Book
6. Bills Payable Book
7. Bills Receivable Book
8. Journal Proper
Classifying (Posting into
Ledger)
Summarizing
Trial Balance
Trading and Profit and Loss Account
Balance Sheet.
Analysis and Interpretation
Communicating to the Users
ACCOUNTING PROCESS
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Financial Accounting
Financial Accounting is that branch of accounting,
which records financial transactions and events,
summarises and interprets them and communicates
the results to the users.
The end-product of Financial Accounting is the Profit
and Loss Account for the period ended and the
Balance Sheet as on the last day of the accounting
period.
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Cost Accounting
The limitation of Financial Accounting in respect of
information relating to the cost of products or
services led to the development of a specialised
branch, i.e., CostAccounting.
It ascertains the cost of products manufactured or
services rendered and helps the management in
decision-making (say price fixation) and exercising
controls.
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Management Accounting
Management Accounting is the most recently
developed branch of accounting.
It is concerned with generating accounting
information relating to funds, costs, profits, etc., as it
enables the management in decision-making.
We may say that Management Accounting
addresses the needs of a single user group, i.e., the
management.
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BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY
Meaning of Book Keeping
Book Keeping is part of Accounting and it is
concerned with:
Identifying financial transactions and events,
Measuring them in terms of money,
Recordingthe financialtransactions and eventsso
Classifying recorded transactions and events, i.e.,
posting them into Ledger accounts.
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BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY
Definitions of Book Keeping
"Book Keeping is an art of recording in the books of accounts
the monetary aspect of commercial and financial
transactions."
-Northcott
"Book Keeping is an art of recording business dealings in a
set of books."
-J.R. Batliboi
"Book Keeping is the science and art of recording correctly in
the books of accounts all those business transactions that
result in the transfer of money or money's worth."
-R.N. Carter
"Bool: Keeping is the art of recording business transactions
in a systematic manner."
-A.N. Rosen Kampff
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BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY
Accounting
Accounting is an art of
recording,
classifying and
summarising the financial data and interpreting the
results thereof.
Accounting is a wider concept than Book Keeping.
It starts where Book Keeping ends. In other words,
Book Keeping is a part of accounting.
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BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY
DIFFERENCE BETWEEN BOOK KEEPING AND ACCOUNTING
Basis Book Keeping Accounting
1. Scope Book Keeping is concerned with
identifying financial transactions;
measuring them in money terms;
recording them in the books of
accounts and classifying them.
Accounting is concerned with
summarising the recorded
transactions, interpreting them
and communicating the results.
2. Stage It is a primary stage. It is a secondary stage. It begins
where Book Keeping ends.
3. Objective The objective of Book Keepingis
to maintain systematic records of
financial transactions.
The objective of accounting is to
ascertain net results of operations
and financial position and to
communicate information to the
interested parties.
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BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY
DIFFERENCE BETWEEN BOOK KEEPING AND ACCOUNTING
4. Nature of Job This job is routine in
nature.
This job is analytical and
dynamic in nature.
5. Performance Junior staff performs this
function.
Senior staff performs this
function.
6. Relation Book Keeping is the basis
for accounting.
Accounting begins where
Book Keeping ends.
7. Special Skills Book Keeping is
mechanical in nature and
thus, does not require
special skills.
Accounting requires special
skills and ability to analyse
and interpret.
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BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY
Accountancy
Accountancy refers to a systematic knowledge of
accounting.
It explains how to deal with various aspects of
accounting.
It educates us why and how to maintain the books of
accounts and how to summarise the accounting
information and communicate it to the users.
In the words of Kohler, accountancy refers to the
entire body of the theory and practice of accounting
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BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY
Accounting and Accountancy
Accountancy is an area of knowledge whereas
accounting is the action or process used in this
area.
Accounting depends on the rules and principles
framed by the Accountancy but Accountancy does
not depend onAccounting.
It may be said that Accountancy is the whole thing
while Accounting is the application part of
accountancy.
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OBJECTIVES OF ACCOUNTING
The objectives or functions of accounting are:
Maintaining Systematic Records of Financial
Transactions an Events
Ascertaining Profit or Loss
Ascertaining Financial Position
Assisting the Management
CommunicatingAccounting Information to Users
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FUNCTIONS OF ACCOUNTING
The functions of accounting are:
Maintaining Systematic Records
Communicating the Financial Results
Meeting Legal Requirements
Protecting BusinessAssets
Assistance to Management
Stewardship
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ADVANTAGES OF ACCOUNTING
Followings are the advantages of Accounting
Financial Information about Business
Assistance to Management
Replaces Memory
Facilitates Comparative Study
Facilitates Settlement of Tax Liabilities
Facilitates Loans
Evidence in Court
Facilitates Sale of Business
Assistance in the Event of Insolvency
Helpful in PartnershipAccounts
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LIMITATIONS OF ACCOUNTING
Followings are the limitations of accounting
Accounting is not Fully Exact
Accounting does not Indicate the Realisable Value
Accounting Ignores the Qualitative Elements
Accounting Ignores the Effect of Price Level
Changes
Accounting may Lead to Window Dressing
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ACCOUNTING INFORMATION
"Accounting is a service activity. Its function is to
provide qualitative information, primarily financial in
nature, about economic entities that is intended to be
useful in making economic decisions."
-Accounting Principles Board
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Types of Accounting Information
The Accounting Information can be categorised
into the following:
Information Relating to Profit or Surplus;
Information Relating to Financial Position; and
Information about Cash Flow.
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USERS OF ACCOUNTING INFORMATION
Internal Users
• Owners
• Management
• Employees and Workers
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SYSTEMS OF ACCOUNTING
The systems of recording transactions in the
books of accounts are two namely:
1. Double Entry System and
2. Single Entry System.
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Double Entry System
The Double Entry System of accounting was
developed in the 15th Century in Italy by Lucas
Pacioli.
Under the system,
aspects-Debit and
every transaction
Credit and at the
has two
time of
recording a transaction, it is recorded once on the
debit side and again on the credit side.
The Double Entry System has proved to be a
scientific and complete system of accounting
followed by every enterprise and organisation.
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Double Entry System
For example, at the time of cash purchases, goods
are acquired and in return cash is paid.
In the transaction, above two aspects are involved,
i.e., receiving goods and paying cash
Under the Double Entry System, both these aspects
are recorded.
One part, i.e., the receipt of goods is debited and the
second part, i.e., payment of cash is credited.
The method of Debit and Credit will be discussed in
“Accounting Procedure – Rule of Debit and
Credit”
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Features of the Double Entry System
It maintains a complete record of each transaction.
It recognises the two-fold aspect of every transaction,
viz., the aspect of receiving (value in) and the aspect
of giving (value out).
In this system, one aspect is debited and other aspect
is credited following the rules of debit and credit.
Since, one aspect of a transaction is debited and the
other is credited, the total of all debits is always equal
to total of all credits. It helps in establishing
arithmetical accuracy by preparing the Trial Balance.
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Stages of Double Entry System
The following are the three different stages of a
complete system of a double entry book keeping:
Recording the transactions in the Journal.
Classifying the transactions in the Journal by posting
them to the appropriate ledger accounts and then
preparing the Trial Balance.
Closing the books and preparing the final accounts.
All these stages shall be discussed one by one in
succeeding chapters.
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Advantages of the Double Entry System
The main advantages of Double Entry System are
Scientific System
Complete Record of Transactions
A Check on theAccuracy ofAccounts
Ascertainment of Profit or Loss
Knowledge of Financial Position
Full Details for Purposes of Control
Comparative Study is Possible
Helps Management in Decision-Making
No Scope of Fraud
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Single Entry System
Single Entry System of recording transactions in the
books of accounts, may be defined to be an
incomplete Double Entry System.
In this system, all transactions are not recorded on
the double entry basis.
As regards some transactions, both aspects of the
transactions are recorded, as regards others, either
one aspect is recorded or not recorded at all.
Instead of maintaining all the accounts, only
Personal Accounts and Cash Book are maintained
under this system.
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Single Entry System
The accounts maintained under this system are
incomplete and unsystematic and therefore, not
reliable.
The Single Entry System is also known as Accounts
from Incomplete Records.
Since all transactions are not recorded under double
entry principle, it is not possible to prepare a Trial
Balance.
As a result, the Profit and Loss Account and the
Balance Sheet cannot be prepared.