Accounting is that system under which the transactions and events of business are recorded in monetary terms. Under it, accounting terms and concepts are used to describe the events that make up the existence of business. It records the business transactions taken place during the accounting period. At the end of the period, it shows the result of the transactions in the form of final accounts consisting of profit and loss account and balance sheet.
For preparing these accounting includes identifying, recording, classifying, summarising and interpreting the results of the business transactions, so that, accurate decisions may be taken regarding business. Accounting is a means of communicating business information relevant to the objectives of the decision makers both internal and external.
Scope Of Accounting
(1) Knowledge of Financial Position – An important objective of accounting is to know the financial position of the business. In order to fulfill this objective, balance sheet is prepared at the end of the year in which total assets and liabilities are recorded. Thus, accounting is helpful in providing the knowledge about the financial position of the business.
(2) Helpful in Raising Loan – The financial statements of business such as profit and loss account as well as balance sheet are helpful in raising loans. Every financial institution wants to know about the financial statements of the business. If proper books of accounts are maintained in the business, then it becomes easy to raise loan. On the contrary, if proper accounting books are not maintained in the business, then it becomes difficult to raise loan.
(3) Proof in Court – The accounting books maintained by business can be presented as proof in the court in case of any dispute because these are supported by the authenticated documents. Hence, accepted by the court as a firm evidence.
(4) Helpful in Comparative Study – It is very helpful in comparative study because under it, all transactions related to different periods are recorded properly. On the basis of these, future decisions can be taken. For example, a business firm can know how much increase or decrease has been occurred in income and expenditure by comparing the income and expenditure accounts of different periods.
(5) Useful for Other Parties – Many parties are interested to know about the financial statements of the business. Accounting provides useful information to all these parties. The usefulness of accounting for these parties has been explained here under:
- For Management: Managers require various important information for efficient operation of business activities which are provided by the accounting. For example, accounting information is required for making plans, taking decisions, controlling the business, etc. which may be provided through accounting.
- Investors : Investor is the person who has invested the money in business. Thus, he wants to know whether the money invested by him is safe or not. Therefore, he is interested to know the financial position of business and on these basis, he takes the decision whether he should invest further in the firm or not.
- Creditors : Creditors are also interested to know the financial records of business at the end of accounting period because on these basis, they can estimate whether they will receive their money on due date or not.
- For Lenders and Bankers: The lenders and bankers want to know the financial position of business before granting loans. If they are fully satisfied with the financial position of business, then the a business gets loan easily but it is possible only when proper records are maintained in the business.
Objectives Of Accounting
(1) Calculation of Profit and Loss – The main objective of accounting is to calculate the profit or loss for a definite period of time from business transactions. In order to fulfill this objective, ‘Trading and Profit and Loss Account’ is prepared at the end of accounting period. Under it, purchases, sales, incomes and expenses of the whole year are recorded. If the total income of a business is more than expenses, then business earns net profit. On the contrary, if expenses are more than total income of business, then business suffers net loss.
(2) Keeping Systematic Record of Business Transactions – Under accounting, all business transactions are recorded regularly according to the respective dates, so that these transactions or records may be kept for a long time. The complete record of business transactions decreases the possibility of errors and frauds in accounts. In order to fulfill this objective, oftenly all transactions are recorded prior in journal or subsidiary books. Afterwards, these transactions are posted into ledger.
(3) Depicting the Financial Position – The objective of accounting is to depict the financial position of the business. For this, balance sheet is prepared at the end of the financial year. It shows the various assets on the one hand and the liabilities and capital on the other hand. It depicts the financial position of the business on a certain date.
(4) Portray of Liquidity Position – Accounting provides information about the liquidity position of firm to the internal and external parties because through it, current assets and current liabilities of firm are recorded fully. With its help, different parties related to the firm may take right decisions.
(5) Detection of Errors and Frauds – If all accounts related to business transactions are recorded properly, then errors and frauds can be detected easily.
(6) Assessment of Tax – Each business firm has to pay the tax on its income, production, sales etc. The accurate accounting books are helpful in the assessment of tax because the complete knowledge regarding actual sales production and income of business is obtained through these. In their absence the tax authority can charge high amount of tax from the business.
(7) Communicating the Accounting Information – Accounting communicates the required accounting information to the various interested parties such as owners, creditors, investors, bankers, government etc. Such information enables these parties to take the important decisions regarding business.
Types Of Accounting
(1) Financial Accounting – It is the original form of accounting. It is concerned with recording of the business transactions in a systematic manner. After that, these transactions are classified and summarised to ascertain the net results and financial position of the business. For this purpose, profit and loss account and balance sheet are prepared. This branch of accounting provides the accounting information to the various interested parties of business whether internal or external.
(2) Cost Accounting – Cost accounting is a wide term and a formal mechanism in which costs of products and services are ascertained and controlled. Cost accounting includes the ascertainment of cost, applications of cost control methods, procedures etc. It is the accounting process of ascertaining the total cost and per unit cost of goods produced or service rendered by the business. It provides the way to have the scientific and fair view of the components of total cost and per unit cost of product or service. It has also been referred to an art of determining cost. The primary purposes of cost accounting include controlling cost, stimulating cost conciousness, ascertaining per unit cost of a product, determination of profit and loss for various products and services, inventory valuation etc. Mainly manufacturing and service units use this type of accounting.
(3) Management Accounting – The Word ‘Management Accounting is comprised of two words ‘Management’ and ‘Accounting’. It is the study of managerial aspect of accounting. It represents the financial data in such a manner that helps the management in carrying out its functions like planning, organizing, directing and controlling more efficiently. Management accounting is also known as Accounting for Managerial Decisions’. Every firm requires relevant information for making decisions regarding efficient use of resources. These information are provided by the management. Through these information, the plans and policies are prepared for the business. Management Accounting’ is used to describe the modern concept of accounts as a tool of management. In addition to costing and accounting data, management also requires socio-economic and statistical data. These information are beyond the scope of cost accounting and financial accounting. Management accounting removes these limitations and provides all possible information needed for managerial purposes. When accounting caters to need of internal uses of the management, then it is known as ‘Management Accounting’.
(4) Tax Accounting – Such accounting is concerned with that system which helps in solving the tax problems. All the transactions which are related to tax i.e. income tax, sales tax, etc. are computed on the basis of tax accounting.
(5) Government Accounting – The accounting done by central, state and local government is termed as government accounting. It includes budget, public accounts, reserve funds, contingent funds, etc.
(6) Social Responsibility Accounting – The business and the society bear a ‘give and take’ relationship. As we see that the society provides factors, services, market and other assistance to the business, so it becomes necessary that the business must bear some responsibilities towards the society. That is why, the concept of Social Responsibility Accounting’ has gained much importance these days. At present, the business is expected to shoulder the responsibility of providing employment, better products, social security, etc. to the common mass. Various techniques have been developed these days in order to measure the contribution of the business towards the welfare of the society.
(7) Human Resource Accounting – Human resource accounting may be defined as the measurement and reporting of the data about human resources as organisational resources and communicating this information to the various interested parties of the business. Thus in modern time, different branches of accounting are required by the managers for the effective operation of managerial activities.