Meaning of Accounting
 Accounting has rightly termed as the language of the business .The

basic function of a language is to serve as a means of communication .Accounting also serves this function .It communicates the results of business operations to various parties who have some stake in business viz., the proprietor ,creditors ,investors ,government and other agencies. Accounting as an information system is the process of identifying ,measuring and communicating the economic information of an organization to its users who want information to make decisions. It identifies transactions and events of a specific entity .it measures transactions and events in terms of common measurement unit i.e. the currency of a country. It involves collection, recording, classification and presentation of financial data for the benefit of management and outside agencies such as shareholders, creditors, bankers and government.

 According to American Institute of Certified Public

Accountants (AICPA) “Accounting is an art of recording, classifying, and summarizing in a significant manner the money transactions and events which are in part at least of a financial character and interpreting the results thereof”.
 According to American Accountant Associations

(AAA), “ Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decisions by users of the information”.

The amount of Assistance to the various parties Nature and value of assets.NEEDS OF ACCOUNTING Need for accounting is greater for a person to know Whether the receipts are more than the payments Balance of cash in hand Evidence in court in case of dispute Settlement of taxation liability Sale of business The amount .if any . The amount of loss .size and causes of increase or decrease of capital .  Nature and value of liabilities. .

setting wages disputes.Accounting as an Information System  Information needs of management : management needs information for planning. The supply of information at appropriate time help management in achieving the business objectives  Information needs of shareholders & Investors : various laws have been passed under which financial statements should be prepared in such a way that required information is supplied to the shareholders & creditors  Information needs of employees: accounting information is required for deciding workers share in profits. . etc. organizing & controlling the activities of business.

 Information Needs of Government : Govt. in deciding the social & economic policies. dividend policy etc. profits. liquidity. & profitability of the business. They need information about liquidity position of the company. . So they will study information concerning solvency.The information helps the govt. needs information about sales. Information needs of creditors : Creditors are mainly interested in creditworthiness of the business. liquidity.

Accounting as an information system Accounting Decision – making Data Business activities & transactions Recording of data (measuring business transactions Processing of data (preparation and storage of data Communication (as financial Statements & other Statements & reports) .

To know profit or loss of the business . . To ascertain the financial position of the concern:  Nature and value of assets  Nature and extent of liabilities  Whether the enterprise is solvent or not  Whether the business concern is over trading  To make information available to various groups and users at a particular time . 3.Objectives of Accounting To maintain records of the business 2. 1.

Users with indirect financial interest 1. . Users with direct financial interest 3.Importance of Accounting  Accounting is useful to the following parties Management or managers 2.

negotiation labor agreements. . financial performance in terms of plans & goals. employees. setting economic policies. consumer group general public. approving supply decisions Users with indirect financial interest: (customers. brokers.Accounting Management: (directors. press etc. labor unions. heads and supervisors) Decisions: Assessing profitability. credit decisions.) Decisions: Assessing tax. financial analysts and advisors. marking plans and policies Users with direct financial interest: (Present and potential shareholders. managers. assessing company status and prospects. officers of the company. taxation authorities. protecting investors and public interest advising on investment decisions. dept. creditors. measuring social and environmental protection programmed. suppliers) Decisions: Share investment decision.

mutual dependence. scope.  Difference: Objects. It is a part of accounting. . interpretation and use of information.  Accounting : It is concerned with measurement.Book Keeping & Accountancy  Book Keeping: It is an art of keeping or maintaining records in a prescribed manner. analysis. results of the business.

Auditing of accounts . 1. 2.Role of Accountant Maintenance of books of accounts . 3. 4. Financial services . . Taxation .

Management accounting 1. . Cost accounting 3.Branches of Accounting Financial accounting 2.

It is that branch of accounting which communicate the financial information of a business unit .classifies business transactions and prepares summaries of the same to determine profit and loss and the financial position of the concern .Financial Accounting  Financial accounting records . .

7. Communicating results Making information more reliable . 5. 2. Interpreting financial information . Making summaries Dealing with financial transactions .Functions of Financial Accounting 1. 3. 4. . Recording of information Classification of data . 6.

Limitations of Financial Accounting  Historical nature  Provide s information about concern as a whole  Not helpful in price fixation  Cost control not possible  Only actual costs recorded  Quantitative information  Chances of manipulation  Not helpful in taking strategic decisions .

Cost Accounting  Cost Accounting is the classifying . service or unit . contract. job. recording & appropriate allocation of expenditure for the determination of the costs of products or services. process. It includes the ascertainment of the cost of every order.

 Ascertaining profitability of each product .  Providing useful data to the management for taking decisions . .  Presentation of costs for cost reduction & cost control  Planning & decision making  Preparation of budgets and implementation of budgetary control .Functions of Cost Accounting  Analysis and ascertainment of costs.

f) Provides cost data for comparison in different period g) Useful tool for managerial control & helps in cost reduction & cost control. e) Helps management in periods of trade depression & competition by determining actual cost of product.Cost Accounting as an aid to management: a) Provides reliable cost data in regard to material. Helpful to employees . Advantages to govt. 3. overhead and other expenses b) Helps in price fixation c) Provides information on which estimates & tenders are base d) Helps in determining profitable & non-profitable activities.Importance & Advantages 1. & society . labor. 2.introduction of incentive wage system & bonus plans.

. valuation of closing stock etc. items purely financial nature such as interest.  It does not take into consideration all items of expenses and incomes e. discount and loss of shares and debentures etc.Limitations of Cost Accounting  It is not independent system of accounts  There is scope of subjectivity on items like depreciation.g.

Management Accounting  Management accounting is that system of accounting which helps management in carrying out its functions more efficiently . Rose “Management accounting is concerned with accounting information which is useful to management .G.It is that field of accounting which deals with providing information for the purpose of planning .control management of costs and determination for financial purpose .” .  According to T.decision-making .performance evaluation .

Characteristics of Management Accounting  Providing accounting information  Cause & effect relationship  Use of Special Techniques & concepts  Achieving of objective  Taking important decisions  No fixed norms followed  Supplies information & not decision  Concerned with forecasting .

Scope of Management Accounting            Financial Accounting Interpretation of data Cost Accounting Control procedures & methods Financial Management Internal audit Budgeting & forecasting Tax accounting Inventory Control Office services Reporting to management .

Functions of Management Accounting          Planning and forecasting Modification of data Financial Analysis & interpretation Facilities managerial control Communication Use of qualitative information Coordinating Helpful in taking strategic decisions Supplying information to various levels of management .

Financial Accounting Management Accounting Is the process of Data identification Measurement Accumulation Analysis Preparation and Analysis Communication of information to management & others Cost Accounting Other Sources Planning & decision-making FEEDBACK Implementation MANAGEMENT ACCOUNTING PROCESS Control .

Limitations of Management Accounting  Based on accounting information  Intuitive Decisions  Not an alternative to Administration  Top heavy structure  Evolutionary stage  Personal bias  Psychological resistance .

Under Co-law. employees bankers etc. management. These cannot be audited Accounts are audited.Distinction between Management & Financial Accounting Management Accounting 1. 2. Useful to management in formulating plans & policies Financial Accounting To record various business transactions & know financial Useful to Shareholders. Object To assist the management in decision-making & policy formulation. Auditing Deals with projection of data Concerned with historical for the future data.Usefullness 3. auditing of accounts in compulsory . Nature 4. creditors.

No emphasis is given to actual Only actual figures are figures. Compulsion It is not compulsory.Momentary transactions are monetary information. Reporting 8. Beneficial to different levels of management. for a particular 9. period. Reports are prepared to find out profitability financial position of the concern. Period 10. service function. Precision 7.Describtion Uses both monetary and non. Publication Financial accounts are published for the benefit of the public. It is It is compulsory. recorded.5. . Qualitative things are not recorded. Reports are useful for insiders & outsiders. 6. Reports are meant only for internal use only. recorded & there is no concern for approximate figures. These are not published. It supplies information from Prepared time to time during whole year.

2.Nature 4. and Certain principles & procedures No specific rules and procedures are followed for recording costs are followed.Data used 5. .Distinction between Cost & Management Accounting Cost Accounting 1. figures in the future. Object Management Accounting To record the cost of producing a To provide information to the product or providing a service. Scope 3. aspect is Uses both quantitative qualitative concepts. Principles Followed Deals preliminary ascertainment. Useful for both past and present Concerned with the projection of recorded. management for policy formulation & planning. Only quantitative recorded. of different products. with cost Scope is very wide.

control & decision making.e. Reports operating results at the Gives information of costs to end of years. labour & overheads costs. Cost Accounting Provides information to the management for proper planning operation. Accounts are prepared to meet the requirements of Loss Act and Income Tax Act. records & analysis the transactions in a subjective manner i. management as & when desired. according to the nature of expense. 2) Forms of Account 3) Recording 4) Control 5) Periodicity of reporting It classifies. It provides detail system of control for materials. . It records expenditure in an objective manner according to the purposes for which the costs are incurred. These are generally kept Voluntarily to meet the requirements of the management.Distinction between Financial & Cost Accounting 1) Purpose Financial Accounting Provides information about the profit & loss & financial position of the concern. It lays emphasis on the recording aspect without attaching any importance to control.

P.6) Information Only monetary information is Non-monetary information like used. 9) Stock valuation Stocks are valued at cost or market Stocks are valued at cost. 8) Figures Deals mainly with actual facts & Deals partly with facts & figures figures. Not maintained with the object of Provides sufficient data for price fixing selling price. Fixation of S. fixation. units is also used. price which is lower. 7. . & partly with estimates.


”  Accounting principles are classified into two parts.” “Accounting principles are the rules of action or the methods and procedures of accounting commonly adopted while recording business transactions. . a settled ground or basis of conduct or practice.Accounting Principles  The word principle is used to mean a general law or rule adopted or preferred as a guide to action. (b) Accounting conventions. (a) Accounting concepts.

Money acts as a medium for immediate exchange of goods and services . 3. other transaction will be ignored from the accounting books. business is treated as a separate entity from its owners so distinction is made between business transactions & personal transactions. 2. necessary assumptions & conditions upon which accounting is based.e. The term concept is used to connote basic accounting Accounting Concepts postulates i. The present resources of the concern are utilized to attain the long term objectives of the business. 1. Money measurement Concept : Only the monetary based transaction will be recorded in the accounting books. Going Concern Concept : it is presumed that the concern will continue to exist indefinitely or long period of time. Business Entity Concept : in accounting.

So two entries are made Accounting period Concept: It is the period for which we will prepare our accounts to determine profitability. Cost Concept: Cost price is only recorded in the accounting books. . market price will be ignored from the accounting books. 7. Matching Concept: At the end of the period total expenses matched with total revenue to find the profit or loss. Every transaction is recorded twice because if one is getting then the other is giving.4 5 6 Dual Aspect Concept : It is based on the principle that for every debit transaction . there is a corresponding credit transaction.

Income is the outcome of expense. Realization Concept : According to this concept sales or profit on sales will be considered to be realized when either money(cash) is realized or legal obligation is created . ownership or the title to the good is transferred 9. i. Matching of Cost & Revenue Concept : All expenses are matched with all the incomes. Because no income can arise without having incurred an expense.8. .e.

but should be followed continuously . This information should not only include figures given in the final accounts but also information which occurs after the preparation of balance sheet but before presentation of financial statements 2. . It may continue for long period of time. investors and government bodies. Balance Sheet) disclosed to owners. 1. Conventions of Consistency: Accounting principles and practices should not be changed year to year.Accounting Conventions  Accounting conventions are traditions usage and customs which are in use since long . System once started should not be changed randomly. Conventions of Disclosure: Material based information (Profit and Loss A/c. There should be uniformity in accounting departments.

Cost of that pencil is immaterial. E. then cost is now material and will be recorded. it should be taken into account at the earliest. That can be ignored. Conventions of Conservatism : Its all about adopting policy “Playing Safe”. According to it immaterial item should not be recorded.g. If there is a possibility of loss. A prospect of profit should be ignored up to the time it does not materialize.3. . The principle of ‘ anticipate no profit & provide for all possible losses’ is followed 4. An item can be material for one business and can be immaterial for the other. Now if hundreds of pencils are purchased. Conventions of Materiality Only those items should be recorded which are material (significant) for the firm. a single pencil is purchased.

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