Need of Accounting: Every businessman is interested to know the information about their business such as profit or loss of the year, amount invested as capital in the business, amount to be received from debtors & amount to be paid to creditors. These information can be received through complete records of their transactions which can be measured in terms of money.
Every individual performs some kind of economic activity [ activities which are performed for earning livelihood and to acquire wealth]. In business such activities are performed through transactions & events.
Transaction is an agreement buyer and seller while event is a consequence of transactions, a result. Therfore, all business transactions are recorded through accounting.
Meaning of Book-keeping: It is consist of two words i.e, Book + Keeping. In accounting, book means accounting books in which business traansactions are recorded & keeping means writing or maintaining business transactions in books of accounts.
Note: Financial data relating to business operation are recorded in book-keeping & book-keeping is the part of accounting.
Definition of Book-keeping: According to North Cott, “Book-keeping is the art of recording in the books of accounts the monetary aspects of commercial or financial transactions.”
Meaning of Accounting :
Accounting is the process used by business entities in which business transactions in monetary form are recorded by which profit or loss can be known by a busines person who invests money in the business.
Definition of Accounting: According to American Institute of Certified Public Accountants [ICPA], ” Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money , transactions and events, in part, at least, of a financial character and interpreting the result thereof.”
Characteristics/Nature/Features of Accounting:
- Recording: This is the basic function of accounting and those business transactions which can be measured in terms of money are recorded in the books of account. Further, the book in which transactions are recorded is called “Journal” and the journal may be divided into subsidiary books as per size of business.
- Classifying: After recording business transactions in original books, transactions are classified according to nature and then record one nature in one place. The book in which transactions are classified is called a “ledger”. In a ledger, separate accounts of individuals, separate expenses, incomes, liabilities and assets etc. maintain.
- Summarising: Summarizing is concerned with the preparation and presentation of financial statements that are useful to the internal & external users of financial statements. Under this, a trial balance is prepared. That is the basis of preparation of financial statements [Trading A/c, Profit & Loss A/c and balance sheet].
- Accounting Cycle/ Accounting Process: Transactions-Journal-Ledger-Trial Balance-Trading A/c-Profit & Loss A/c-Balance Sheet………………………………………Journal
4. Analyzing:
Analysis means classification of data of financial statements as the figures given in the financial statements will not understand by anyone unless they are in simplified form.
- For example, all items relating to fixed assets and current assets are put at different place. Furthermore, Profit and Loss A/c and Balance Sheet provide the basis for interpretation.
5. Interpreting: Interpreting means the financial statements are interpreted in such a manner that the end users can make a meaningful judgement about the financial condition and profitability of the busines entities.
Difference between Book-keeping and Accounting
| Sr. No | Book-keeping | Accounting |
| 1. | It is the first step which is concerned with recording of transaction. | This is the second step which starts where book-keeping ends. |
| 2. | It is a base for accounting. | It is considered as a language of the business. |
| 3. | The purpose is to primary recording of business transactions. | The purpose is to ascertain profit & loss and balance sheet. |
| 4. | Book-keeping has no sub-field. | It has several sub-fileds like financial, cost accounting etc. |
| 5. | It does not include final accounts | It includes final accounts. |
| 6. | With the help of these records, management cannot take decision relating to business. | With the help of these records, managerial decision can be taken. |
Branches/Types of Accounting
- Financial Accounting: It covers the preparation of financial statements [mainly profit & loss A/c and balance sheet] and interpreting thereof.
- Cost Accounting: It prepares Cost sheet and ascertain cost of production [manufacturing A/c]. In brief, it helps the management to control cost.
- Management Accounting: It is concerned with internal reporting to the managers. In fact, tools and techniques are used for analyzing financial statements such as ratio analysis, common size statements, trend analysis, fund flow analysis etc.
Objects/functions/Advantage of Accounting
- Keep Systematic Records: The first function of accounting is to keep a systematic records of business transactions.
- Ascertaining Profit/Loss: accounting helps to ascertain profit or loss for any period because profit & loss account is prepared at the end of every year.
- Showing the Financial Position of the Business: Financial position as on or at a particular date is known throgh balance sheet because balance sheet is a true picture of financial position. Besides, how much the business has to receice from and how much the business has to pay, assets and how much capital was in the begining & how much is at the end of the year. These all are known with the help of balance sheet.
- Protecting & Controlling Business Properties: Accounting furnishes information about money due from and due to various parties. Therefore, accounting helps in disposal of any property of the business entity.
- Providing Information to various Parties: This is one of the main objective of accounting to provide the information to the interested parties like owners, creditors, management, employees, customers, government etc.
- Helps in decision making: Accounting information relating to financial or cost helps the management in planning & decision making.
- Evidence in Legal matters: Acounting information can be used as evidence in a court.
- Comparison of Results: Accounting information is used to compare the results of different years.
9. Helps in Taxation matters: With the help of accounting information, tax authorities draw a conclusion about the taxation matter.
Limitation of Accounting
- Incomplete Information: Transactions which are of financial character and expressed in terms of money are recorded only.
- Accounting Information may be Biased: The accountant has to take decison regarding different methods of valuation of inventory , methods of depreciation, provision for doubful debts, treatment of capital and revenue items etc.
- Hence, the income cannot be treated as correct.
- Accounting can be Malipulated: Accounting information can be manipulated because owner does not express information in books of account which are of his own interest.
- Fixed Assets are Recorded at the original Cost: The value of fixed assets change oover time and so there may be difference between original cost and current cost..
- Unsuitable for forecasting: Factors like demand of goods, policy of firm, level of competition etc. are not considered in accounts.
- Accounting Ignores Time value of Money: Accounting ignores some money factors like inflation.
- Conflict in Accounting principles: There are occasions where accounting principles conflict with each other.