Chapter 1 Meaning and

Objectives of Accounting
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Table of Contents
Meaning of accounting: ..................................................................................................... 2
Characteristics of accounting: ............................................................................................ 2
Accounting cycle: ............................................................................................................... 4
Objectives of Accounting: .................................................................................................. 5
Difference between Book-keeping, Accounting and Accountancy: ..................................... 6
Types of Accounting: ......................................................................................................... 7
Users of accounting information: ....................................................................................... 9
Advantages and Limitations of Accounting: ..................................................................... 10

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Meaning of accounting:

Accounting is the 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 results thereof.

Characteristics of accounting:

1. Accounting is an art as well as science:

Accounting; like science follows a systematic and organized path to understand the
economic status of an entity.
Science is obtaining knowledge by a systematic pattern including observation, study,
practice, experiments and investigation. Like Science; Accounting requires gaining
knowledge about the economic status of an entity by systematic study. An
accountant finalizes the economic results by identifying, analyzing, classifying using
the method of double entry book-keeping system.
So, Accounting is a science that comprises of rules, principles, concepts,
conventions and standards in science.
Art is the application of techniques and methods. Accounting is an art because it
presents the financial findings by following and implementing universally accepted
principles (GAAP)
Art is the study of application of scientific method to practical use. Accounting is an
art as the established rules and principals of accounting is applied to bookkeeping
process of an economic entity.
2. Recording of financial transactions only:
Only financial transactions are recorded, i.e. transactions which can be measured in
terms of money. Example- if there is a quarrel in the company which leads to strike
will not be recorded in the books though it may affect the earnings of the company.

3. Recording in terms of money:

Every financial transaction is recorded in journal in money terms.

4. Classifying:
After recording the transactions, transactions of one nature are grouped and placed
in separate accounts known as ledger.

5. Summarizing:
After classification, data is summarized, i.e. presented in a form which is
understandable and useful to management. This involves Trial Balance, Trading and
P&L account and Balance Sheet.

6. Interpretation of results:

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Then the results are presented in such a manner that could be easily understandable
by the related parties. Interpretation is normally done using Ratios.

7. Communicating:
Then these results are provided to these parties.

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Accounting cycle:

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Objectives of Accounting:

Objectives of Accounting

Systematic record of all business

transactions

Ascertain financial position

Ascertain the progress

Calculate profit and loss

Detect errors and frauds

Provide information to various parties

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Difference between Book-keeping, Accounting and

Accountancy:

•Book-keeping is an art of recording day to day transactions and is a

part of accounting. It ensures that records of the individual financial
Book- transactions are correct, up-to-date and comprehensive.
keeping

•The systematic and comprehensive recording of financial

transactions or statements of business that also includes
storing,retrieving , summarizing and presenting the information in
Accounting the form of reports and their analysis is known as accounting.

•Accountancy is a body of knowledge that prescribes the sets of

principles that are used during the process of accounting to
maintain uniformity, and assess the information easily.
Accountancy

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Types of Accounting:

Accounting

Social
Financial Cost Tax Management
Responsibilty
Accounting Accounting accounting Accounting
Accounting

v Financial accounting records the business transactions in a systematic manner to

ascertain profit and loss of the accounting period and determine the financial position
and progress of the business.

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v Cost accounting ascertains the total cost and per unit cost of goods produced and
services provided by the business. It helps the management to estimate the cost in
advance and exercise cost controls.
v Management accounting uses various techniques to make accounting data more useful
for managerial decision making / decision making of internal management which is
involved with running of the business.
Ø For example- Managerial accountants use capital budgeting to assess the potential
cash inflows and outflows of specific business decisions. For example, if a
manufacturer was planning to open a new production facility, they would first need
to determine the total cost of the project and the expected Return On Investment.
v Tax accounting is used for tax purposes.
v Social responsibility accounting - Social Accounting, also known as Social Responsibility
Accounting, is a part of an evolving corporate reporting system that assesses and takes
responsibility for the company’s effects on the environment and its impact on social
welfare. It is a concept that has been introduced to better articulate the measures that
contribute to long-term value and the role organisations play in society. It is also a
subset of the Triple Bottom Line accounting framework which emphasises three
dimensions of performance: Social, environmental and financial. It goes beyond the
profit motive of businesses and focuses on sustainable development.
Ø Why Social responsibility accounting- Business is a socio-economic activity that
continuously draws its required resources from society. Its value is shaped by factors
additional to the financial performance that as how efficiently it is using social
resources. Socially responsible companies do not limit themselves to using resources
to engage in activities that increase only their profits. They integrate economic,
environmental and social objectives with the company’s operations and growth.
Social Accounting determines whether the organisation’s goals, policies,
programmes and strategies are consistent with society.
Ø Tata group was the first in India which started Social Accounting with the aim to
examine and report to what extent the company has been able to fulfil its objectives
regarding its social and local community.

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Users of accounting information:

Internal External
Users Users

Government
Management
Public
Owners
Creditors
Employees
New investors

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Advantages and Limitations of Accounting:

Advantages of Accounting Limitations of Accounting

• Helpful for management
• Helpful in planning and controlling
• Helpful in decision making
• Provides systematic record
• Ascertaining profit and loss
• Ascertaining financial position
• Comparative study
• Tax assessment
• Helpful in raising loans
• Detects errors and frauds
• Influenced by personal judgement-
eg provision for doubtful debts;
recording certain expenditure as
revenue or capital exp.
• Based on conventions- based on
guidelines for issues not
addressed by accounting
standards.
• Omission of Qualitative
information
• Based on Historical costs
• Affected by window dressing
• Forecasting based on past events
becomes difficult

The Following Characteristics of Accounting information make it relevant and useful for
users from multiple dimensions -

Faithful
Presenta
tion

Reliabilt Qualitative Compara

y Characterist bility
ics of
Accounting
Information
Relevanc Understa
e ndability

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