Unit 1- ACCOUNTING AND ITS FUNCTIONS

1. The Emerging Role of Accounting

 Stewardship Accounting: In earlier times in history, wealthy people employed

‘stewards’ to manage their property. These stewards rendered an account of their
stewardship to their owners periodically.
 Financial Accounting
 Cost Accounting
 Management Accounting
 Social Responsibility Accounting: Social responsibility accounting widens the
scope of accounting by considering the social effects of business decisions, in addition
to the economic effects.
 Human Resource Accounting: Human Resource Accounting is a branch of accounting
which seeks to report and emphasise the importance of human resources
(knowledgeable, trained, loyal and committed employees) in a company’s earning
process and total assets. In simple words, it involves accounting for investment in
people and their replacement costs, as well as accounting for the economic values of
people to an organisation.
 Inflation Accounting:It aims at correcting the distortions in the reported results
causedby price level changes. Generally, rising prices during inflation have the
distorting influence of overstating the profit.

2. Accounting As An Information System

Accounting served as an information provider to the following users;

 Shareholders and Investors: Since shareholders and other investors have
investedtheir wealth in a business enterprise, they are interested in knowing
periodically aboutthe profitability of the enterprise
 Creditors: The main concern of the creditors is focused on the credit worthiness of
the firms and its ability to meet its financial obligations.
 Employees: Greater emphasis is on industrial democracy through employee
participation in management decisions has important implications for the supply of
information to employees.
 Government: The task of the Government in managing the industrial economy of the
country is facilitated if accounting information is presented, as far as possible, in a
uniform manner.
 Management: Planning, organising, and controlling are all concerned with making
decisions which have their own specific information requirements.
 Consumers and others.
3. Accounting Personnel

 Internal Auditor:An Internal Auditor is an employee of an organisation. The internal

auditor is responsible for performing monitoring activities, and other services,
including designing and operating the system of internal control, auditing the data
reported to the directors of the company, and assisting external auditors.
 Controller: or Chief Accountant.She/he is overall in-charge of all activities
comprising financial accounting, cost accounting, managementaccounting, tax
accounting, etc. She/he exercises authority both for accounting withinthe
organisation and for external reporting.
 Treasurer: She/he is the custodian and manager of all the cash and near-cash
resources of the firm.
 Finance Officer: Financing decision is concerned with determining the optimum
financing mix, or capital structure. It examines the various methods by which a firm
obtains short-term and long-term finances through various alternative sources.
 Unit 2- ACCOUNTING CONCEPTS AND STANDARDS

1. The Accounting Framework

The American Institute of Certified Public Accountants (AICPA) and Generally Accepted
Accounting Principles (GAAP) encompass the conventions, rulesand procedures necessary to
define accepted accounting practice at a particular

2. Accounting Concepts

Business Entity Concept: In accounting we make a distinction between business and the
owner. An enterprise is an economic unit, separate and apart from the owner, or owners. As
such, transactions of the business and those of the owners should be accounted for, and
reported separately.

Money Measurement Concept:States that all transactions are to be recorded only

inmonetary terms and record only those transactions, which can be measured in
moneyterms. It ignores intangibles like employee loyalty and customer satisfaction, as
theycannot be expressed in money terms. It also assumes records on the basis of a stable
monetary unit.

Going concern concept refers to the expectation that the organisation will have an indefinite
life. This assumption has an important bearing on how the assets are to be valued.

Cost Concept states that an asset is to be recorded in books of accounts at a price for, or at a
cost incurred to acquire it.

Accrual concept says that an accountant should recognise incomes and expenses when they
have actually accrued, irrespective of whether cash is received or paid.

Conservatism concept forbids the inclusion of unrealised gains but advocates provision for
possible losses.

Materiality concept admonishes that events of relatively small importance need not be given
a detailed or theoretically correct treatment. They may be ignored for recording purpose.

Consistency concept envisages that accounting information should be prepared on a

consistent basis from period to period, and within periods there should be consistent
treatment of similar items.

Periodicity concept divides the life of a business into smaller time periods which are
generally one year, and the accountant is supposed to prepare necessary financial
statements for each time period.

3. The Changing Nature Of Generally Accepted Accounting Principles

Generally accepted accounting principles are usually developed by professional accounting
bodies like American Institute of Certified Public Accountants (AICPA) and Institute of
Chartered Accountants of India (ICAI). Since the environment, in which business operates,
undergoes constant changes as a result of changes in economic and financial policies of the
Government and changes in the structure of business, continued evaluation of the relevance
of generally accepted accounting principles is required.

4. Accounting Standards In India

With a view to harmonise varying accounting policies and practices currently in use in India,
the Institute of Chartered Accountants of India (ICAI) formed the Accounting Standards
Board (ASB). So far, twenty eight standards have been issued by ASB.