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Accountancy Theory

Accountancy Theory



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Published by: api-3798255 on Oct 17, 2008
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1.Define accounting and explain its objective?

Accounting is the concerned with recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization 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 result in changes to those resources and claims.

The committee on terminology set up by American Institute of Certified Public
Accountants(AICPA) has been defined the term accounting in 1961 as follows:

\u201cAccounting is an art of recording, classifying and summarizing 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 result thereof\u201d.

The analysis of above definition brings out the functions of accouting:

This is the basic function of accounting.It is essentially concerned with not only ensuring that all business transactions of financial character are recorded but also that they are recorded in an orderly manner. Transactions of recording is done in \u2018Journal\u2019 or subsidiary books.Depends upon the size and nature of the business the subsidiary books to be maintained.


Classification is concerned with the systematic analysis of recorded facts, with a view to group transactions or entries of one nature at one place. This type of process is calledledger. The ledger contains different pages of individual account 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 Ledger shall flow based on the entries passed in the Journal. The ledger accounts will help in knowing the total expenditure under various heads for a given period.

Summarising:This involves presenting the classified data in a manner which is

understandable and useful to the internal as well as external end-users of financial statements.This process involves preparation of Trail Balance ,Income Statement ,Balance Sheet,Profit & Loss Accounts.

Deals with financial transactions: Accounting records only those transactions and

events in terms of money, which are of a financial nature. In other words the transaction 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 sound technological knowledge, cannot expressed in terms of financial numbers and hence will not be recorded in the books of accounts of the company.

Interpretation: This is the final function of the accounting. The recorded financial

data is interpreted in a manner that the end-users can make a meaningful judgment about the financial condition and profitability of the business operations. The data is also used for preparing the future plans and framing of policies for executing such plans.

The above definition does not clearly reflect the present role performed by accounting. A widely accepted definition of the term accounting is given by American Accounting Association,which is follows:

\u201cAccounting is the process of identifying, measuring and communicating information
to permit judgment and decision by the users of accounts.\u201d
The main components of the above definition are:
1.Transactions and events are measured and relevant data are processed and

communicated to the users.
2.Accouting data is relevant for decision-making
3.There are users of accounts who need economic information. The users of accounts

are investors, employees, lenders, suppliers and creditors, customers, government
and public.

Various user groups may have diversified interests either conflicting or complementary, but it is not possible to provide information separately for such users. Therefore a general purpose financial statement is necessary to be provided to all 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 would have been tremendous burden on the human memory, which in most cases would have been impossible to bear.

2.To protect business properties: Accounting provides protection to business properties from unjustified and unwanted use. This is possible by providing information the following information to the management:

1.The amount of owner\u2019s 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 remain
idle or under-utilized.

3.To ascertain the operational profit or loss: Accounting helps in ascertaining the net profit or loss upon carrying on the business. This is done by maintaining the proper record of revenues and expenses for a particular period.

4.To ascertain the financial of position of the business: The profit and loss accounts reflects the performance of the business during a particular period. However, it is also necessary to know the financial position i.e. where we stand. What we owe and what 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 for ascertaining the financial health of the business.

5.To help rational decision-making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required level of authority in order to facilitate rational decision-making.


Accounting information is useful not only for the owners and management but also useful to Creditors, Employees, Governments and prospective investors. The main objective of the accounting is to reflect the true and fair picture of profitability and financial position, which helps management to take corrective actions and future decisions.

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