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Accountancy Theory

Accountancy Theory

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Published by subhasishmajumdar

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Published by: subhasishmajumdar on Feb 28, 2010
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SUBHASISH……………ACCOUNTSNOTES…………………………….MAJUMDAR……………………………………………………………………………………………………………………………….1.Define accounting and explain its objective?A:
Accounting is the concerned with recording and reporting of financial transactions,including the origination of the transaction, its recognition, processing, andsummarization in the FINANCIAL STATEMENTS.Formal record that represents, in words, money or other unit of measurement,certain resources, claims to such resources, transactions or other events that resultin changes to those resources and claims.
The committee on terminology set up by American Institute of Certified PublicAccountants(AICPA) has been defined the term accounting in 1961 as follows: “Accounting is an art of recording, classifying and summarizing in a significantmanner and in terms of money, transactions and events which are, in part at least,of a financial character and interpreting the result thereof”.The analysis of above definition brings out the functions of accouting:
This is the basic function of accounting.It is essentially concerned with not onlyensuring that all business transactions of financial character are recorded but alsothat they are recorded in an orderly manner. Transactions of recording is done in ‘Journal’ or subsidiary books.Depends upon the size and nature of the business thesubsidiary books to be maintained.
Classification is concerned with the systematic analysis of recordedfacts, with a view to group transactions or entries of one nature at one place. Thistype of process is called
The ledger contains different pages of individualaccount heads under which all financial transactions of similar nature are collected.For example the expenses may be classified under various heads like Traveling ,Communications, Printing, Purchases, Stationary etc. All the entries in the Ledgershall flow based on the entries passed in the Journal. The ledger accounts will help inknowing the total expenditure under various heads for a given period.
This involves presenting the classified data in a manner which isunderstandable and useful to the internal as well as external end-users of financialstatements.This process involves preparation of Trail Balance ,Income Statement,Balance Sheet,Profit & Loss Accounts.
Deals with financial transactions:
Accounting records only those transactions andevents in terms of money, which are of a financial nature. In other words thetransaction which are not of financial nature are not recorded in the books of accounts. For example a company, which has a team of employees with soundtechnological knowledge, cannot expressed in terms of financial numbers and hencewill not be recorded in the books of accounts of the company.
This is the final function of the accounting. The recorded financialdata is interpreted in a manner that the end-users can make a meaningful judgmentabout the financial condition and profitability of the business operations. The data isalso used for preparing the future plans and framing of policies for executing suchplans.The above definition does not clearly reflect the present role performed byaccounting. A widely accepted definition of the term accounting is given by AmericanAccounting Association,which is follows: “Accounting is the process of identifying, measuring and communicating informationto permit judgment and decision by the users of accounts.” The main components of the above definition are:1.Transactions and events are measured and relevant data are processed andcommunicated to the users.2.Accouting data is relevant for decision-making3.There are users of accounts who need economic information. The users of accountsare investors, employees, lenders, suppliers and creditors, customers, governmentand public.Various user groups may have diversified interests either conflicting orcomplementary, but it is not possible to provide information separately for suchusers. Therefore a general purpose financial statement is necessary to be provided toall users.
Objective of Accounting:
The following are the main objectives of the accouting:1.To keep systematic records: Accounting is done to keep systematic records of financial transactions. In absence of a scientific method of accounting, there wouldhave been tremendous burden on the human memory, which in most cases wouldhave been impossible to bear.
2.To protect business properties: Accounting provides protection to businessproperties from unjustified and unwanted use. This is possible by providinginformation the following information to the management:1.The amount of owner’s fund invested in the business.2.How much the business owes to others.3.How much the business has to recover from others.4.How much business owns the assets.This information helps the management in ensuring that the assets do not remainidle or under-utilized.3.To ascertain the operational profit or loss: Accounting helps in ascertaining the netprofit or loss upon carrying on the business. This is done by maintaining the properrecord of revenues and expenses for a particular period.4.To ascertain the financial of position of the business: The profit and loss accountsreflects the performance of the business during a particular period. However, it isalso necessary to know the financial position i.e. where we stand. What we owe andwhat we own. The objective is met by Balance Sheet, which shows the state of affairs of assets and liabilities as on a given date.It serves as barometer forascertaining the financial health of the business.5.To help rational decision-making: Accounting these days has taken upon itself thetask of collection, analysis and reporting of information at the required points of timeto the required level of authority in order to facilitate rational decision-making.
Accounting information is useful not only for the owners and management but alsouseful to Creditors, Employees, Governments and prospective investors. The mainobjective of the accounting is to reflect the true and fair picture of profitability andfinancial position, which helps management to take corrective actions and futuredecisions.

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