MEANING AND SCOPE OF ACCOUNTING

A. MEANING OF ACCOUNTING

Accounting is the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions, and events that are in part at least of a financial character and interpreting the results thereof. The terms “Financial Reporting” and “Accounting” are often used as synonyms for practitioners’ accounts.

The process of accounting starts by identifying the events and transactions which are of financial character and then be recorded in the books of account. This recording is done in journals or subsidiary books, also known as primary books. A proper system of recording includes suitable classification of transactions and events as well as their summarisation for ready reference. After recording all the transactions and events they are transferred to ledgers where they are being classified in terms of income, expense, assets & liabilities according to their characteristics and summarised in profit and loss accounts and balance sheet, and these transactions and events are measured in terms of money.

The accounting function is way different than what it’s been said in the above paragraph as the dimension of accounting is much broader than described in the above definition. According to the above definition, accounting ends with interpretations of the results of the financial transactions and events but in the modern world with the diversification of management and ownership, globalization of business and society gaining more interest in the functioning of the enterprises, the importance of communicating and motivating informed judgment has also become the part of accounting.

The function of accounting is to provide quantitative information, primarily of financial nature, that is needed to be useful in making economic decisions. Thus, accounting may be defined as the process of recording, classifying, summarising, analyzing, interpretations of financial transactions, and communicating the results thereof, to the persons interested in such information.

The procedural aspects of accounting can be explained in two parts: 1. Generating the financial information 1.1 RECORDING is a basic function of accounting where all the business transactions are being evidenced by some sought documents such as sales bills, passbooks, salary slips, etc. which are recorded in the books of account. The recording is done in a book called “JOURNAL”. 1.2 CLASSIFYING the recorded data with a view to group the transaction having the same nature in one place so as to put information in compact and usable form. The book that contains the classified information is called “LEDGER”. 1.3 Summarising here means preparing and presenting the data in a manner useful to both the Internal Users and External Users of the financial statements which leads to the preparation of the following financial statements: 1.3.A TRIAL BALANCE 1.3.B PROFIT AND LOSS ACCOUNT 1.3.C BALANCE SHEET 1.3.D CASH FLOW STATEMENT 1.4 Analysing the figures given in the financial statement and bringing some useful data out of it by presenting it in a simplified form by putting each item to its respective category under which it falls in one place such as all items relating to current liabilities are put at one place. It is concerned with the establishment of a relationship between the items of the Profit and Loss Account and Balance Sheet i.e. it provides the basis for interpretation. 1.5 Interpreting is concerned with explaining the meaning and significance of the relationship as established by the analysis of accounting data. The recorded financial data is analyzed and interpreted in a manner that will enable the end-users to make a decision about the financial condition and profitability of the business operations. And such a financial statement will explain not only what happened in the business but why did it happen and what all can happen in specified situations. 1.6 Communicating is the final and last thing for which all the previous phases were carried out to transmit the data summarised, analyzed, and interpreted information to end-users that enables them to make a rational decision on the financial statements. And all such is carried out by preparing and presenting the accounting reports which include many other reports than usual Profit and Loss Account and Balance Sheets such as Accounting Ratios, Graphs, Diagrams, Fund Flow Statement, Cash Flow Statement, etc.

2. Using the financial information The financial information generated above is now being used by the users which compared to earlier was the Proprietor or Owner of the business, but the changing relationships as comparing the earlier users to the present users it has changed. Besides the owner or the management of the business, there are many other users of accounts which include the Investors, Employees, Lenders, Suppliers, Customers, Government and other agencies, and the public at large. The information generated will be useless if it is not material to a user’s decision. Information generated should not be biased in any scenario as it can be the decision of the user of accounts. The users of the accounts can be either of the two i.e. either the Internal User or the External Users.

B. INTRODUCTION

On daily basis, each and every individual performs some sought of economic activity so whether it is a salaried person, a group of individuals forming a club, an individual or group of individuals running a business, a local authority, etc all are carrying some kind of economic activities which may differ from one another in some areas.

Economic activities may give an individual benefit sometimes or maybe social i.e. for the public, at large depending on the objective of such economic objective. Transactions i.e. mean a business, activities performed, an agreement made to conclude the transaction, etc., and events i.e. results, happenings, etc., are the paths through which such economic activities occur.

Now let’s take an example to understand the term transaction and events which will be encountered while performing economic activities say an individual invests Rs. 10 Lacs in a restaurant business where he purchases raw material for Rs. 1.5 Lacs, salary to the chef for Rs. 30,000 and salary to staff for Rs. 20,000 and sells the finished goods converting raw material into finished goods for Rs. 2 Lacs and still have raw materials for Rs. 30,000 in hand.

According to the above example, the result of his activity is what will be our next step and we see that an individual running the restaurant business earns a surplus of Rs. 30,000.

Finished Goods Sold Rs. 2,00,000 Raw Materials In Hand Rs. 30,000 _ —————– Total Rs. 2,30,000 Less: Raw Materials Purchased Rs. 1,50,000 Less: Salary to Chef Rs. 30,000 Less: Salary to Staff Rs. 20,000 _ —————– Surplus Rs. 30,000 _ ——————

Analyzing the example by bifurcating the whole example into the transaction and an event which is as follows :

Transaction(s) :- 1. Purchase of Raw Materials 2. Sale of Finished Goods 3. Money invested in Business 4. Payment to chef and staff

Event(s) :- 1. Earning of Surplus of Rs. 30,000 2. Raw materials in hand Similarly in other cases there are many other transactions and events that occur in day-to-day economic activities.

Accounting has a universal application for recording transactions and events and presenting suitable information to aid decision-making regarding any type of economic activity ranging from a personal function to national government functions. The aim of accounting is to meet the information needs of the rational and sound decision-makers, and thus, called the language of business.

C. PROCESS OF ACCOUNTING

• The whole accounting that we do is having the procedure or a process which is being done to complete the accounting so that the valuable information out of the accounts perepared and presented can be formed for the users to form decisions on the financial statements accordingly.
• First part or the step in this process would be the to have the INPUT which is gathered out of the economic events of the company that occurs at the time of running the business which is measured in terms of financial terms.
• Next step is to identify the transaction that is there which is explained through thr accounting cycle as follows:
  • The trnsactions occured while running the business will be recorded in the books of accounts without ignoring any transaction or leaving it purposefully.
  • After recording all the transactions they now will be transferred to there respective ledgers to which they belong as per there relation to that respective ledgers.
  • Posting all the transactions into ledgers will now makes us proceed towards the making of the TRIAL BALANCE which includes the closing figures of the ledgers that will arise after posting the transactions into ledgers.
  • Last step of accounting cycle is the preparation of financial accounts i.e. Profit and Loss Account, Balance Sheet, etc.
• The final outcome of this will now be the information which will be shared to the users of the accounts that could be the Internal users (Board of Directors, Partners, Managers, Officers, etc.) or te External users (Investors, Lenders, Suppliers, Governmnt Agencies, Customers, etc.) as the case may be.

D. OBJECTIVES OF ACCOUNTING

• SYSTEMATIC RECORDING OF TRANSACTIONS
  • It is the book keeeping of transactions we are talking about as per the businesses which we are dealing but the thing which needs to be remembered or taken care off is to recroding it in a systematic manner.
  • After recording the transactions systamatically it is now being summarised in a manner so that the financial account can be prepared and a proper analysis and interpretation of accounts can be done so provide the valuable information.
• ASCERTAINING RESULTS OF ABOVE RECORDED TRANSACTIONS
  • An accountant of the entity will make the Profit and Loss Account of the company for a particular period of time as required or asked by the users. The result of the Profit and loss Account can result out two things which is either the company is running Profitably or the compay is not running Profitably i.e. incurring Losses. The running of the business has multiple objectives but out of all one of the main aim is to make profit out of the business.
• ASCERTAINING FINANCIAL POSITION OF THE BUSINESS
  • Other than Profit and loss for the period in the business the businessman has other things to look after which is equivalent important for the growth of the business to stay in the market fot long term .i.e a businessman is also anxious about what all Assets and Liability does the business has or the owner of the business has as on a particular date which we consider as 31st march, XXXX of every financial year and such is being communicated through the Statement which we term it as Balance Sheet of a particular company for a particular period.
• PROVIDING USEFUL INFORMATION TO THE USERS FOR RATIONAL DECISION MAKING
  • The financial staements that is prepared by the companies in the format prescribed under the relevant law which is applicable to each company is the base for all the Stakeholders to take the decision about the concerned company to their respective field which is having their interest in it.
• TO DETERMINE THE SOLVENCY POSITION
  • Through the Balance Sheet the company do tells about all the Assets and Liabilities that the company is having on a particular date but other than that the company do reveal it’s solvency position for both the Short Term and long Term.

E. FUNCTIONS OF ACCOUNTING

There are many functions of accounting available there in the textbooks which are there written by the different authors and out of all here are the main functions of accounting which are as follows:

1. Government Regualtion and Taxation
   • Doing the accounting in a proper manner by following the principles of accoounting and the standard of accounting which in result helps the Government to excercise the control on the entity to have the true and fair presentation of the books of accounts and it also helps in collection of Tax Revenues.
2. Decision Making
   • Accounting helps the stakeholders which could either be the Internal or External to the organisation that helps in their decision making to conduct the busines with the concerned entity.
3. Control
   • While doing the accounting we got introduce with some waeknessed that are there which might lead to misleading of the information that will be generated from the accounts therefor with the help of accounting after identifying the weaknesses we can work on it take effective measures to control such weaknesses.
4. Forecasting
   • After doing the accounting the information genration through the financial statements which are the Balance Sheet, Profit and Loss Account, Cash Flow Statement, Fund Flow Statement, etc. that helps to forecast the future position of the business and to take appropiate action accordingly.
5. Comparison and Evaluation
   • The showcase of the performance of the business which is being compared with the budgets and actual disclosure of reports and getting to the result after the proper comparison of the both and thereafter evaluating the financial results at the end of the year after closure of books of accounts.
6. Measurement
   • This function of accounting talks about measuring the past performance of the entity and predicting the current position of the entity’s financial position.

F. USERS OF ACCOUNTING INFORMATION

The users of accounting could be either of the following:

• Internal to the Organisation
• External to the Organisation

On the basis of that following are the various users of accounting information:

• Lenders
  • The lenders have invested their money into the business and for them the accounting information is important to know whether the principal and the interest on the money lended will be received within the due limit or not.
  • Is their money safe with the entity or not.
• Customers
  • The customers are the one’s for whom the entity is working so as to serve them by satisfying their demands as they are depending on the supply of goods or services which is also dependent on the manufacturer or the service provider which are the real created of the goods or services. The default in their services will lead to affect the customers as they are concerned with the stability and profitbility of the enterprises.
• Suppliers and Creditors
  • They are the crucial users for the entity as they are the reason for which the entity is able to provide the goods or services to the customers. For the suppliers and creditors the accounting information is important to check the ability of the enterprise whether they can pay their dues or not and on the other hand the credit policy that is their between them is also based on such information.
• Employees
  • Entity is a artificial person as the work is done by the group of individuals which are termed as Employees who are the users which re directly related to the entity as the furture of the entity will define the growth of the them which in the end result in the entity’s ability to provide the remuneration, retirement and other benefits alongwith enhancing employment opportunities.
• Investors
  • In corporate sector where the ownership and management both are seperated in such a situation the investors play the vital role as they have risked their capital into the business and to the position of the entity about whether it can survive, prosper or able to pay the dividend they need the accounting information which will tell them whether to Buy, Hold or Sell their Investment or not.