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Book - Keeping

Definitions of Accounting

“Nearly every business enterprise has accounting system. It is a means of collecting, summarising, analysing and reporting in monetary terms, informations about business.”

Book-keeping

“Book Keeping is an art of recording business dealings in a set of books.”

Accounting

Accounting starts where book-keeping ends. It includes the following activities :

(i) Summarising the classified transactions in the form of Profit & Loss Account and Balance Sheet etc.

(ii) Analysing and interpreting the summarised results. In other words, drawing the meaningful information from Profit & Loss Account and Balance Sheet etc.

(iii) Communicating the information to the interested parties.

Accountancy

It refers to a systematic knowledge of accounting concerned with the principles and techniques which are applied in accounting. It tells us how to prepare the books of accounts, how to summarise the accounting information and how to communicate it to the interested parties. According to Kohler, ‘accountancy refers to the entire body of the theory and practice of accounting.

Types or Sub-fields of Accounting

Management now-a-days requires various types of informations to perform its functions more efficiently. To meet the increasing requirement of management, various specialised branches of accounting have come into existence such as Financial Accounting, Cost Accounting, Management Accounting, Tax Accounting, Social Responsibility Accounting etc. These branches are explained as under :

(1) Financial Accounting:— The main purpose of this branch of accounting is to record the business transactions in a systematic manner, to ascertain the profit or loss of the accounting period by preparing a Profit & Loss Account and to present the financial position of the business by preparing a Balance Sheet. This branch of accounting provides informations required by the management and various other interested parties.

(2) Cost Accounting :— The main purpose of cost accounting is to ascertain the total cost and per unit cost of goods produced and services rendered by a business. It also estimates the cost in advance and helps the management in exercising strict control over cost.

(3) Management Accounting :— The main purpose of management accounting is to present the accounting information in such a way as to assist the management in planning and controlling the operations of a business. The management accountant uses various techniques and concepts to make the accounting data more useful for managerial decision making. These techniques include ratio analysis, budgetary control, fund flow statement, cash flow statement etc.

(4) Tax Accounting :— The branch of accounting which is used for tax purposes is called Tax Accounting. Income tax and GST are computed on the basis of this accounting.

Role of Accounting

Role of accounting has been changing with the changes in business environment and increasing social demands. Over the centuries, the role of accounting remained confined to the record keeping of financial transactions only. But, today’s rapidly changing business environment has changed the role of accounting and at present the accounting plays the following different roles :

(1) Role of a Language :— Accounting is viewed as a language of business because it prepares reports and statements which communicate information -regarding the business enterprise.

(2) Role of Historical Record :— Accounting is viewed as chronological record of all financial transactions in the books of accounts according to specified rules.

(3) Role of Determining the Net Profit :— It is also regarded as a means of determining the true profit or loss of a business enterprise.

(4) Role of Determining the Financial Position :— It is also regarded as a means of showing the financial position of the business by the preparation of Balance Sheet.

(5) Role of Information System :— Accounting is now regarded as an information system because it is capable of providing the kind of information which managers and other interested parties require for taking appropriate decisions.

(6) Role of Service Provider :— Accounting is regarded as a service activity because it provides quantitative financial information which is helpful to the users in different ways.

Nature of Accounting

(i) Economic Events : Accounting records only economic events. An economic event is a transaction which can be measured and expressed in terms of money.

(ii) Identification, Measurement, Recording and Communication :

Identification : It means determining what transactions are to be recorded. It involves observing activities and selecting those events that are of financial character and relate to the organisation.

Measurement : It means quantification of business transactions into financial terms by using monetary units.

Recording : Accounting is the art of recording business transactions according to some specified rules and in chronological order.

Communication : The recorded events are communicated to management and other internal and external users regularly through accounting reports.

(iii) Organisation : It refers to a business enterprise which can be a sole-proprietory concern, partnership firm, company or any other association of persons.

(iv) Interested Users of Information : They may be internal users and external users. Internal users include Chief Executive, Financial Officer, Vice President, Plant Managers, Stores Managers etc. External users include owners, potential investors, creditors, lenders, labour unions, Tax Authorities, Customers etc.