Session 1

07 June 2021 09:51 PM

Accounting is the language of business, an information system, an art, methodology / means, process,
science / principles / rules, etc.
Accounting is an art as it records, classifies and summarizes all financial information.
Accounting is a science as it is structured knowledge, which is based on certain basic principles.
Accounting is a repetitive process.

Non-maintenance of records leads to

- information loss,
- no track of events,
- information leakage,
- stealing,
- financial losses,
- scope for financial crimes, frauds, etc.

Accounts are maintained because of the need for and the purpose of accounting.
Accounting helps the businesses
- to identify and measure every aspect that takes place in the business,
- to summarize the information and identify the performance of the business,
- to find the current financial position of the business,
- to know where the money is coming from and where it is applied / paid / used,
- and the like.

Accounting helps
- in planning the required resources,
- pricing of the products or services,
- identifying business opportunities,
- liquidity,
- legal requirements,
- control over business, etc.

Apart from these, accounting also helps in

- predicting the performance and financial position of the business for future,
- basing on these predictions, the business will also be able to take proper and appropriate decisions
for future actions.

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Users of Accounting Information
Shareholders
Shareholders are the people who have contributed money to the organization for its operations. They get
into the capacity of owners with this act.

Investors
To determine whether they should buy / hold / sell
To assess ability of enterprise to pay dividends

Lenders
Lenders also contribute money to the organization for its operations, but will remain as outsiders rather
than becoming the owners of the business.

All these three categories of persons, are contributing money to the organization, hence, will be looking for
the security of their money as well as expecting something in return for the amount they contributed.

Suppliers and Customers

Suppliers and customers are the persons who are involved in the supply chain of the business. They will be
interested in the flourishing of the business so that their own transactions with this organization will be
continuing for a longer time period. They look for assured business with the organization.

Government and their agencies

Interested in the allocation of resources and activities of enterprise
To regulate the activities of the enterprise, determine taxation policies, serve as basis for determining
national income and similar statistics.
Government and regulatory authorities are interested to check the statutory compliances of the
organization along with its tax compliances.

Public
Information about trends and recent developments in its prosperity and range of activities

Management of the enterprise

Information in financial statements and additional management information help in carrying out the
planning, decision-making and control responsibilities of the management.
Managers are the people involved in the decision making at various levels in the organization. They have the
responsibility to answer to the owners, along with accountability towards the various business decisions that
they have taken.

Employees
Employees look for betterment in their pay structures; expect incentives, etc. from the organization.
To assess ability of enterprise to provide remuneration, retirement benefits and employment opportunities.

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So, with this entire backdrop, let us now define what accounting should be:

Accounting is a systematic process of identifying, recording, measuring, classifying, verifying,

summarizing, analyzing, interpreting and communicating financial information for use of the end users.

Identifying involves finding out whether the information is accounting or not.

Recording involves the noting down of all the relevant details of every transaction that happens in the
organization.
Measuring is the presentation of the accounting information in monetary terms.
From these recorded details, we need to categorize all similar transactions into groups, and this is called as
classifying.
After checking for the correctness of the recorded details called verifying, we need to find the net balances
in each category of information, and this is called as summarizing.
From the information of the summarized transactions, we need to arrive at results understanding the
impact of such result, and this is called as analyzing the information.
Once the results are identified and analyzed, we need to interpret them and communicate to the end users
so that it helps them in decision making.

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