Learning Objectives:
After studying this chapter, you should be able to understand:
• Meaning of Accounting
• Accountancy, Accounting and Book-keeping
• Relationship between Accountancy, Accounting and Book-keeping
• Distinguish between Book-keeping and Accounting
• Users of Accounting information
• Advantages and limitations of Accounting.
• Basic Accounting terms
• Double Entry System of Book-keeping
Introduction
According to American Institute of Certified Public Accountants, “Accounting is the
art of recording, classifying and summarising the economic information 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.”
Accounting Principles Board (APB) of AICPA (U.S.A) defined accounting as
“Accounting is a service activity. Its function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to be useful
in making economic decisions.”
In Simple words, accounting is the process of collecting, recording, classifying,
summarising and communicating financial information to the users for judgment
and decision-making.
Objectives of Accounting
1. To keep systematic and complete records of financial transactions in the
books of accounts according to specified principles and rules to avoid the
possibility of omission and fraud.
2. To ascertain the profit earned or loss incurred during a particular accounting
period which further help in knowing the financial performance of a business.
3. To ascertain the financial position of the business by the means of financial
statement i.e. balance sheet which shows assets on one side and Capital &
Liabilities on the other side.
4. To provide useful accounting information to users like owners, investors,
creditors, banks, employees and government authorities etc who analyze
them as per their requirements.
, 5. To provide financial information to the management which help in decision
making, budgeting and forecasting.
6. To prevent frauds by maintaining regular and systematic accounting records.
Advantages of Accounting
7. It provides information which is useful to management for making economic
decisions.
8. It help owners to compare one year’s results with those of other years to
locate the factors which leads to changes.
9. It provide information about the financial position of the business by means of
balance sheet which shows assets on one side and Capital & Liabilities on the
other side.
10. It help in keeping systematic and complete records of business transactions in
the books of accounts according to specified principles and rules, which is
accepted by the Courts as evidence.
11. It help a firm in the assessment of its correct tax Liabilities such as income tax,
sales tax, VAT, excise duty etc.
12. Properly maintained accounts help a business entity in determining its proper
purchase price.
Limitations of Accounting
13. It is historical in nature; it does not reflect the current worth of a business.
Moreover, the figures given in financial statements ignore the effects of
changes in price level.
14. It contains only those informations which can be expressed in terms of money.
It ignores qualitative elements such as efficiency of management, quality of
staff, customers satisfactions etc.
15. It may be affected by window dressing i.e. manipulation in accounts to
present a more favorable position of a business firm than its actual position.
16. It is not free from personal bias and personal judgment of the people dealing
with it. For example different people have different opinions regarding life of
asset for calculating depreciation, provision for doubtful debts etc.
, 17. It is based on various concepts and conventions which may hamper the
disclosure of realistic financial position of a business firm. For example assets
in balance sheet are shown at their cost and not at their market value which
could be realised on their sale.
Book Keeping – The Basis of Accounting
Book keeping is the record-making phase of accounting which is concerned with
the recording of financial transactions and events relating to business in a
significant and orderly manner.
Book Keeping should not be confused with accounting.Book keeping is the
recording phase while accounting is concerned with the summarizing phase of an
accounting system. The distinction between the two are as under.
Book keeping Accounting
1. It is the recording phase of an 1. It is the summarizing phase of an
accounting system. accounting system.
2. It is a primary stage and basis for 2. It is a Secondary Stage which begins
accounting. where the Book keeping process ends.
3. It is routine in nature and does not 3. It is analytical in nature and required
require any special skill or knowledge special skill or knowledge.
4. It is done by junior staff called book- 4. It is done by senior staff called
keepers accountants.
5. It does not give the complete picture
5. It gives the complete picture of the
of the financial conditions of the
financial conditions of the business unit.
business unit.
Types of accounting information
Accounting information can be categorized into following:
18. Information relating to profit or loss i.e. income statement, shows the net
profit of business operations of a firm during a particular accounting period.
19. Information relating to Financial position i.e. Balance Sheet. It shows assets on
one side and Capital & Liabilities on the other side.
20. Schedules and notes forming part of balance sheet and income statement to
give details of various items shown in both of them.
After studying this chapter, you should be able to understand:
• Meaning of Accounting
• Accountancy, Accounting and Book-keeping
• Relationship between Accountancy, Accounting and Book-keeping
• Distinguish between Book-keeping and Accounting
• Users of Accounting information
• Advantages and limitations of Accounting.
• Basic Accounting terms
• Double Entry System of Book-keeping
Introduction
According to American Institute of Certified Public Accountants, “Accounting is the
art of recording, classifying and summarising the economic information 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.”
Accounting Principles Board (APB) of AICPA (U.S.A) defined accounting as
“Accounting is a service activity. Its function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to be useful
in making economic decisions.”
In Simple words, accounting is the process of collecting, recording, classifying,
summarising and communicating financial information to the users for judgment
and decision-making.
Objectives of Accounting
1. To keep systematic and complete records of financial transactions in the
books of accounts according to specified principles and rules to avoid the
possibility of omission and fraud.
2. To ascertain the profit earned or loss incurred during a particular accounting
period which further help in knowing the financial performance of a business.
3. To ascertain the financial position of the business by the means of financial
statement i.e. balance sheet which shows assets on one side and Capital &
Liabilities on the other side.
4. To provide useful accounting information to users like owners, investors,
creditors, banks, employees and government authorities etc who analyze
them as per their requirements.
, 5. To provide financial information to the management which help in decision
making, budgeting and forecasting.
6. To prevent frauds by maintaining regular and systematic accounting records.
Advantages of Accounting
7. It provides information which is useful to management for making economic
decisions.
8. It help owners to compare one year’s results with those of other years to
locate the factors which leads to changes.
9. It provide information about the financial position of the business by means of
balance sheet which shows assets on one side and Capital & Liabilities on the
other side.
10. It help in keeping systematic and complete records of business transactions in
the books of accounts according to specified principles and rules, which is
accepted by the Courts as evidence.
11. It help a firm in the assessment of its correct tax Liabilities such as income tax,
sales tax, VAT, excise duty etc.
12. Properly maintained accounts help a business entity in determining its proper
purchase price.
Limitations of Accounting
13. It is historical in nature; it does not reflect the current worth of a business.
Moreover, the figures given in financial statements ignore the effects of
changes in price level.
14. It contains only those informations which can be expressed in terms of money.
It ignores qualitative elements such as efficiency of management, quality of
staff, customers satisfactions etc.
15. It may be affected by window dressing i.e. manipulation in accounts to
present a more favorable position of a business firm than its actual position.
16. It is not free from personal bias and personal judgment of the people dealing
with it. For example different people have different opinions regarding life of
asset for calculating depreciation, provision for doubtful debts etc.
, 17. It is based on various concepts and conventions which may hamper the
disclosure of realistic financial position of a business firm. For example assets
in balance sheet are shown at their cost and not at their market value which
could be realised on their sale.
Book Keeping – The Basis of Accounting
Book keeping is the record-making phase of accounting which is concerned with
the recording of financial transactions and events relating to business in a
significant and orderly manner.
Book Keeping should not be confused with accounting.Book keeping is the
recording phase while accounting is concerned with the summarizing phase of an
accounting system. The distinction between the two are as under.
Book keeping Accounting
1. It is the recording phase of an 1. It is the summarizing phase of an
accounting system. accounting system.
2. It is a primary stage and basis for 2. It is a Secondary Stage which begins
accounting. where the Book keeping process ends.
3. It is routine in nature and does not 3. It is analytical in nature and required
require any special skill or knowledge special skill or knowledge.
4. It is done by junior staff called book- 4. It is done by senior staff called
keepers accountants.
5. It does not give the complete picture
5. It gives the complete picture of the
of the financial conditions of the
financial conditions of the business unit.
business unit.
Types of accounting information
Accounting information can be categorized into following:
18. Information relating to profit or loss i.e. income statement, shows the net
profit of business operations of a firm during a particular accounting period.
19. Information relating to Financial position i.e. Balance Sheet. It shows assets on
one side and Capital & Liabilities on the other side.
20. Schedules and notes forming part of balance sheet and income statement to
give details of various items shown in both of them.
