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Meaning and Scope of Accounting and Accounting Principles

Accounting is the language of business. Basically a language functions to serve as a means of communication. Accounting also serves this function. It communicates the results of business operations to various parties who have intrest in the business, viz., creditors, investors, Government and other agencies. The need for accounting is all the more greater for a person who is running a business. He must know: (i) What he owns? (ii) What he owes? the modern system of accounting owes its origin to Pacoili who lived in Italy in the 18th Century. In those early days the business organisations and transactions were not so complex due to their being small and easily manageable by the proprietor himself. Things have changed fast during the last half century. Cut throat competition and widening of the market have also reduced the effectiven personal supervision resulting in the decentralisation of authority and responsibility. So, there is a greater need for coordination and control. Old technique of management is no longer considered dependable. Accounting today, therefore, cannot be the same as it used to be about half a century It has also grown in importance and change in its structure with the evolution of complex" giant industrial organisations.

Definition of Accounting
Earlier accounting was considered simply as a process of recording business transactions and the role of accountant as that of recordkeeper. However, accounting has now developed as a tool of management providing vital information concerning the organisation's Accounting today is thus more of an information system rather than a mere recording. The American Institute of Certified Public Accountants (AICPA) defined accounting as follows: "Accounting is the art of recording, classifying and summarising in significant manner and in terms of money, transactions and events which are, in part, at least of a financial character and interpreting the results thereof.

Functions of Accounting
An analysis of the definition brings out the following functions of accounting: 1. Recording. This is the basic function of accounting. It is essentially concerned not only ensuring that all business transactions of financial character are in fact recorded also that they are recorded in an orderly manner. Recording is done in the book called Journal. 2. Classifying. Classification is concerned with the systematic analysis of the recorded transactions with a view to group transactions or entries of one nature at one place. The work of clasification is done in the book termed as "Ledger". This book contains on different pages individual account heads under which all financial transactions of similar nature are collected, for example, there may be separate account heads for Travelling Expenses, Printing, Advertising, etc. 3 Summarising. This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external endusers of accounting statements. This process leads to the preparation of the following statements: (i) Trial Balance, (II) Income Statement and (III) Balance Sheet. 4. Deals with financial transactions. Accounting records only those transactions and events in terms of money which are of a financial character.

Functions of Accounting (con)

5. Analyses and Interpretation. This is the final function of accounting. The recorded financial transaction is analysed and interpreted in a manner that the end-users can make a meaningful view about the financial condition and profitability of the business operations. The data is also used for preparing the future plans and framing of policies for executing such plans. 6. Communicates. The accounting information after being meaningfully analysed and interpreted has to be communicated in a proper form and manner to the proper person. This is done through preparation and distribution of accounting reports, which include besides the usual income statement and the balance sheet, additional information in the form of accounting ratios, graphs, diagrams, funds flow statements etc


Any organised knowledge based on certain basic principles is a 'science'. Accounting is a science. It is an organised knowledge based on scientific principles which have been developed as a result of study and experience. Of course, accounting cannot be termed "perfect science" like Physics or Chemistry where experiments can be carried and conclusions can be drawn. It is a social science. Thus, perfect conclusions cannot be drawn. Art is the technique which helps us in achieving our desired objective. Accounting definitely is an art. The American Institute of Certified Public Accountants also defines accounting as the art.


1 Proprietors. A business is done with the objective of making profit. Its profitability and financial soundness are, therefore matters for proprietors who have invested their money in the business. 2 Managers. In a sole proprietary business, usually the proprietor is the manager. In of a partnership business either some or all the partners participate in the management of business. They, therefore, act both as managers as well as owners. In case of joint s* companies, the relationship between ownership and management becomes all the more rem In most cases the shareholders act merely as rentiers of capital and the management of company passes into the hands of professional managers. 3. Creditors. Creditors are the persons who have extended credit to the company. 4 Prospective Investors. A person who is contemplating an investment in a business will like to know about its profitability and financial position. 5 Government. The Government is interested in the financial statements of a business on account of taxation, labour and corporate laws. 6 Employees. The employees are interested in the financial statements on account of * various profit sharing and bonus schemes.

Accountants are the persons who practise the art of accounting. Accountants can broadly be classified into two categories., Accountants in Public Practice and Accountants in Employment. Accountants in public practice offer their services for conducting financial audit, cost audit, designing of accounting system and rendering other professional services for a fee. Such accountants are usually members of professional bodies. In India there are two recognised professional bodies for this purpose. (i) the Institute of Chartered Accountants of India and (ii) the Institute of Cost and Works Accountants of India. Accountants in Employment These are accountants who are employed in non-business entities or business entities. Non-business entities are a diverse set of organisations including Educational Institutions, Museums, Hospitals, etc. Their object is not to earn profit. The accountants employed by business entities are frequently called Management Accountants since they report to, and are the part ofthe entity's management. These accountants provide information for the tax returns of the business, budgeting, routine operating decisions, investment decision, performance evaluation and external financial reporting.

Branches of accounting can broadly be classified into two categories. (i) Financial Accounting. It is the original form of accounting. It is mainly confined to the preparation of financial statements for the use of outsiders like shareholders, debenture holders, creditors, banks and financial institutions. The financial statements, i.e., the Profit and Loss Account and the Balance Sheet, show them the manner in which operations of the business have been conducted during a specified period. (ii) Management Accounting. It is accounting for the management, i.e., accounting which provides necessary information to the management for discharging its functions. According to the Chartered Institute of Management Accountants, London, "management accounting is the application of professional information in such a way as to assist the management in the formation of policies and in the planning and control of the operations of the undertaking." It provides to the Chief Executive the information from which he can control the business, e.g., information about funds, costs, profits, etc. Management accounting covers various areas such as cost accounting, budgetary control, inventory control, statistical methods, internal auditing, etc

To keep systematic records. 2 To protect business properties. To ascertain the operational profit or loss. To ascertain the financial position of business. To facilitate rational decision-making.


If accounting is the language of business, accounting principle is grammar of the language, through which normally a business house communicates with the outside world. In order to make this language intelligible and commonly understood by all it is necessary that it should be based on certain uniform scientifically laid down standards. These standards are termed as accounting principles. Accounting principles' may be defined as those rules of action or conduct which are adopted by the accountants universally while recording accounting transactions. "They are body of doctrines commonly associated with the theory and procedures of accounting, seen as an explanation of current practices and as a guide for selection of conventions where alternatives exist". These principles can be classified into two categories : (i) Accounting Concepts. (ii) Accounting Conventions.

Accounting Concepts
The term 'concepts' includes those basic assumptions or conditions upon which science of accounting is based. The following are the important accounting concepts: (i) Separate Entity Concept. (ii) Going Concern Concept. (III) Money Measurement Concept. (IV) Cost Concept. (v) Dual Aspect Concept. (vi) Accounting Period Concept. (vii) Periodic Matching of Cost and Revenue Concept. (viii) Realisation Concept.

Accounting Conventions

The term 'conventions' includes those customs or traditions which guide the accountant while preparing the accounting statements. The following are the important accounting conventions Convention of Conservatism. Convention of Full Disclosure. Convention of Consistency. Convention of Materiality.


International Accounting Standards Committee (IASC) came into existence on 29th June, 1973 when 16 accounting bodies from nine nations signed the agreement and constitution for its formation. The Committee has its head quarters at London. The objective of the Committee is "to formulate and publish in the public interest standards to be observed in the presentation of audited financial statements and to promote their world-wide acceptance and." The formulation of such standards will bring uniformity in technology, approach and presentation of results. The Committee has so far issued 41 standards regarding different matters out of which 7 have been withdrawn.

Accounting Standards and the Institute of Chartered Accountants of India

In order to bring uniformity in terminology, approach and presentation of account results, the Institute of Chartered Accountants of India established in 1977, Accounting Standards Boards (ASB). The main function of the ASB is to formulate accounting standards so that such standards will be established by the Council of the Institute of Chartered Accountants. While formulating the accounting standards, the ASB will give due consideration the International Accounting Standards and try to integrate them to the extent possible. It will take into consideration the applicable laws, customs, usages and the business environment prevailing in India. The ASB has so far issued twenty nine definitive standards.