Accounting theory

DEFINITION

“Accounting is 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
financial character and interpreting the
results thereof.”
American Institute of Certified Public Accounts
objectives
• To keep systematic records of business
transactions.
• To calculate profit earned or loss
suffered.
• To identify reasons leading to net profit
or net loss
• To display financial position of
business.
• To portray liquidity position.
objectives
• To ascertain progress of business.
• To detect and prevent errors and
frauds.
• To fill tax returns.
• To communicate financial information to
various parties.
Book-keeping vs Accounting
 • Book-keeping • Accounting

• Includes identification, • Includes summarizing of

measurement, recording classified transactions,
and classification of analysis of results and
transaction. communication of
information.
• Primary Stage. • Secondary stage.
• Aims to maintain • To ascertain net results.
systematic records.
 • Book-keeping • Accounting

• Routine and clerical • Analytical in nature.

in nature. • Performed by senior
• Performed by junior staff.
staff. • High level of
• Limited level of knowledge and skill
knowledge and skill required
required.
USERS
Significance/ IMPORTANCE/ ADVANTAGES

• Offers a complete and systematic

record.
• Helpful to management in planning,
decision making and control of
business.
• Help to ascertain profit or loss.
• Facilitate comparative study.
Significance/ IMPORTANCE/ ADVANTAGES

• Facilitate assessment of tax liability.

• Evidence in the court of law.
• Facilitate raising of loans.
• Helpful in sale of business.
• Display financial position and financial
strength.
limitations
• Based on historical data.
• Many principals applicable.
• Ignorance of qualitative information.
• Does not disclose present value of
business.
limitations
• Affected by window dressing.
• Unsuitable for forecasting.
• Provide information about business
as a whole not on departmental
basis.
QUERIES