I. Concepts of Accounting-

The traditional meaning of Accounting was provided by the American Institute of Certified Public Accountants (AICPA) in 1961 when it defined accounting as: . "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 financial character and interpreting the results thereof.

Accounting is an Art:

Accounting and business people cannot be separated. The businessmen are interested in earning more and more and also accumulating more and more wealth. Accounting as an art helps in ascertaining or knowing the financial results in the form of income (i.e., earnings) and financial position (i.e., wealth)

Recording:

It means that transactions must be written down as early as possible in the books of account e.g. Cash Book, Sales Book, Purchase Book etc., as the case may be, so that a complete record is available about business activities. In general, accountants keep books, ledger files, computer files and commercial . documents- all of which are records.

Classifying:

The purpose of classification is to group the recorded transactions or information of the same type at one place under appropriate headings or account titles. For example, expenses on salaries may be classified at one place under the heading or account title: namely, Salaries Account.

Summarising/ Reporting:

To summarise means to bring together a number of accounts or terms in a single account or term. For example, the accounts of various credit customers like Ram, Aarti, and Rachna etc., are grouped under a single account title of Debtors and so are the accounts of credit suppliers of goods under the title of Creditors.

II Accounting Cycle-

Events: Identification of a transaction in terms of money

 An event means any happening or occurrence. Accounting can be applied to it only if it is in terms of money. For example, sales promotion of a new computer is a business event or accounting event because money is paid on its advertisement. All transactions are events, but all events are not transactions.

It means an accounting transaction is:

Action + Money = Transaction

Recording-

It refers to recording the data in the books of accounts in the form of individual transactions termed as journal

Classifying in the form of ledgers-

Ledgers are tables which collect everything in the journal in their individual tables

Summarising & Analyzing transactions-

Preparation of Profit & loss account and noting down all the assets and liabilities of a business. After completion of the summary analysis of the data is done. This would mean to study the trend of profits or losses, turnover of the business ,etc.

Interpretation:

Now the accountants are expected to explain the contents of their two basic statements, namely, the Income Statement (or profit and loss account) and Balance Sheet. For example, the accountant has to give the reasons for high or low profitability of the enterprise and increase or decrease in the net wealth. (i.e., Assets minus Liabilities). This is called or referred to as interpretation of financial statements.

III. Accounting as a source of information-

Accounting is part of an organisation’s information system, which includes both financial and non-financial data. Accounting is the process of identifying, measuring and communicating economic information to permit judgment and decisions by users of the information. The main objective of accounting is to provide information to the users. Accounting is also required to serve some broad social obligations since the accounting information is used by a large body of people such as customers, employees, investors, creditors and government.

 Interested users of accounting-

Accounting information consists of financial statements, highlights about profitability trends, financial position, and capital structure and so on, given in the annual reports of the companies.

1. Creditors and Short Term Lenders:

Creditors include suppliers of goods and services on credit. Short Term lenders include bankers and other financial institutions. They would like to know that they would be paid on due dates. Their main interest lies in liquidity (cash position) and profitably of business enterprise. They depend on financial statements for their dealings with the business enterprise regarding supply of goods on credit or giving loans.

2. Owners/Shareholders:

 The primary aim of Accounting is to provide necessary information to the owners/shareholders to enable them for a) Setting targets for future periods b) Measuring or obtaining the performance of the business as a whole and also of various departments of the business. c) Comparing the actual performance with the targets and noting the deviations, if any. d) Taking such corrective action as may be necessary to overcome the shortfalls, if any.

3. Investors:

 This category includes the existing and also future shareholders. They are interested in the amount of returns like dividends they are likely to get from the business. They would like to know the profitability of the enterprise from the income statements for a number of years.

 4. Employees (or Labour Unions):

In this category, are included individual employees and groups of employees called Trade Unions. They are interested in more wages or salary, bonus, overtime payments, medical facilities and their demands for these matters are based on profitability as provided by income statement.

5. Government:

The Central, State and Local Governments are interested in the financial statements, primarily for taxes like income tax, sales tax, excise duties etc., since the Government activities and welfare schemes are financed through collection of different types of taxes.

6. Researchers:

 They need accounting information for the purpose of studying the financial aspects of business enterprises and their effect on the economy as a whole.

7. Customers:

They are interested to know if a company will continue to honour product warranties and continue to provide its products in future.

To be useful, the accounting information should ensure to:

• provide information for making economic decisions;

• serve the users who rely on financial statements as their principal source of information;

• provide information useful for predicting and evaluating the amount, timing and uncertainty of potential cash-flows;

• provide information for judging management’s ability to utilise resources effectively in meeting goals;

• provide factual and interpretative information by disclosing underlyingassumptions on matters subject to interpretation, evaluation, prediction, or estimation; and

• provide information on activities affecting the society.

IV. Branches of Accounting

To meet the requirements of different people interested in accounting information, accounting can be broadly classified into three categories :

Financial Accounting:

 The purpose of this branch of accounting is to keep a record of financial transactions and events so that: a) the net result of the operations of the business (profit or loss) during an accounting period can be ascertained;

b) the financial position (assets, liabilities and capital position) of the business as at the end of the period can be ascertained; and

 c) relevant financial information can be provided to management and other interested parties.

 Cost Accounting:

 The purpose of cost accounting is to analyse the expenditure so as to ascertain the cost of each product, operation, service, etc. The price of an article is nothing but the cost plus a certain amount of profit. Unless cost is known, price cannot be fixed rationally. Cost accounting helps not only in ascertaining the costs but also assists the management in controlling the costs.

Management Accounting:

The purpose of management accounting is to assist the management in taking rational policy decisions and to evaluate the impact of its decisions and actions. Examples of such decisions are: pricing decisions, capital expenditure decisions, etc. This branch of accounting is primarily concerned with presenting information that may be needed by management in such decision-making.

Taxation accounting-

With a development of a comprehensive taxation system , it has become indispensable to note down the taxes paid to government in any form whether it is direct tax or indirect tax. The taxation accounting focuses on recording the taxes due & taxes paid in advance. There would be set of at the end of the year in order to find the tax due in the hands of the assessee( the entity).

Social Responsibility Accounting

 Social responsibility accounting is a new phase in the development of accounting and owes its birth to increasing social awareness which has been particularly noticeable over the last two decades or so. Social responsibility accounting widens the scope of accounting by considering the social effects of business decisions; in addition to the economic effects.

V. Qualitative Characteristics of Accounting Information

Accounting information often has quantitative and qualitative characteristics. Quantitative characteristics refer to the calculation of financial transactions. Qualitative characteristics include the business owner’s perceived importance of financial information. Business owners often require financial information when making business decisions. Incorrect or inappropriate information can hamper decision-making or cause business owners to make incorrect assessments about their companies. Some of the qualitative characteristics of accounting information are as follows:

Understandable-

Financial information that is too technical or cannot be understood by a layperson can be ineffective for business owners. Small business owners often use professional accountants to complete various accounting functions.

Usefulness-

 Business owners should carefully request and review accounting information to ensure that it provides the most useful information for the decision-making process.

Relevance

Accounting information should relate to a specific time period or contain information regarding individual business functions. Business owners often conduct a trend analysis when reviewing financial information.

Reliability

Business owners often use accounting information to secure external financing for their business. Information that is not reliable or accurate may cause lenders and investors to question the business’ management ability.

Comparable-

Comparability allows business owners to review their company’s accounting information against that of a competitor. Business owners use comparison to gauge how well their companies operate under certain market conditions.

Consistent

Consistency refers to how business owners and accountants record financial information in a company’s general ledger. Business owners need to ensure that financial transactions are handled the same way.

VI. Objectives of Accounting

i) Maintain of records of Business transactions:

Accounting is done to keep a systematic record of financial transactions, like purchase of goods, sale of goods, cash receipts and cash payments. Systematic record of various assets and liabilities of the business is also to be maintained.

 ii) To ascertain the net effect of the business operations i.e., profit or loss of business:

We know that the primary objective of business is to make profit and the businessman is very much interested in knowing the same. A proper record of income and expenses facilitates the preparation of the profit and loss account (income statement). The profit and loss account reveals the profit earned or loss incurred by the business firm during a particular period.

 iii) To ascertain the financial position of the business:

The businessman is not only interested in knowing the operating results, but also interested in knowing the financial position of his business i.e., where it stands. In other words, he wants to know when the business owes to others and what it owns and what happened to his capital – whether the capital increased or decreased or remained constant. A systematic record of various assets and liabilities facilitates the preparation of a statement known as ‘balance sheet’ (position statement) which answers these questions.

 iv) To provide accounting information to interested parties:

 Apart from the owners, there are various other parties who are interested in knowing about the business firm, such as the management, the bank, the creditors, the tax authorities, etc. For this purpose, the accounting system has to furnish the required information.