In case of manufacturing business, he has to buy raw materials and incur other expenses in the form of wages and salaries, rent, power, insurance, taw, transport, postal and telephone expenses and so on, in the course of production and distribution of goods. In a small sized business the transactions are simple and less in number. But in large sized business the transactions are numerous. These business transactions enable the business to know the result of his business which can be profit or loss for a given period of time.
In order to know the exult of his business, a businessman has to remember all the transaction of his business. However, owing to lack of memory it is not possible for anybody to remember all the transactions over a period of time. This has given rise to maintenance of a set of accounting books in which business transactions are chronologically recorded. The systematic recording of business transactions enable the businessman to account for every transaction without missing any item. Such a system of maintenance of a set accounting books to record business transactions is known as book keeping system. -1 Book keeping and accounting. Meaning and definition of book keeping: Definition: Bookkeeping involves organizing and managing all business transactions in a company. Bookkeeping is the recording, on a day-today basis of the financial transactions and information pertaining to a business. It is concerned with ensuring that records of those individual financial transactions are accurate, up-to-date and comprehensive. Accuracy is therefore vital to the process. Bookkeeping provides the information from which accounts are prepared but is a distinct process, preliminary to accounting.
Each transaction, whether it is a question of purchase or sale, or hang of loans, has to be recorded in the books. In principle transactions have to be recorded daily into the books or the accounting system,for each transaction, there must be a document that describes the business transaction, in the terms of a simple sales invoice, sales receipt, a supplier invoice, a supplier payment, bank payments and Journals. 1 Definition of accounting: The systematic and comprehensive recording of financial transactions pertaining to a reporting these transactions.
The financial statements that summarize a large company’s operations, financial position and cash flows over a particular period are a incise summary of hundreds of thousands of financial transactions it may have entered into over this period. Accounting is one of the key functions for almost any business; it may be handled by a bookkeeper and accountant at small firms or by sizable finance departments with dozens of employees at larger companies. 2 Differences between book keeping and accounting: The terms “bookkeeping” and “accounting” do not have the same meaning.
Accounting is much wider than bookkeeping. The difference between bookkeeping and accounting arises due to the following reasons: Points of difference Bookkeeping Accounting . Area of work Bookkeeping involves the recording of business transactions in a prescribed manner Accounting in addition to recording of business transactions, also includes other matter such as making adjustments, preparation of income statement, balance sheet and interpreting results thereof. 2. Knowledge and skill No professional knowledge and skill is required for a bookkeeper.
Professional knowledge and skill is prerequisite for an accountant. 3. Scope Bookkeeping is an initial stage of accounting therefore, the scope of bookkeeping is limited. It provides the primary information about the business. The scope of accounting is wider. 4. Nature of Job Much of the work of a bookkeeper is clerical in nature and the Job is is mainly preliminary. The work of accountant is technical in nature. Modern accounting serves as eyes and ears to the management. It has become the foundation on which the whole structure of commerce rests and without which no business can be run at all. 5.
Information It provides the primary information to the business. It provides information about the final results of the business 6. Financial decisions Financial statements are not prepared from bookkeeping records. Financial tenements are prepared from accounting records. 7. Business conditions It does not give the complete picture of the financial condition of the business unit. It gives the complete picture of financial condition of the business unit. 8. Managerial decisions It does not provide any information for taking managerial decisions It provides information for taking managerial decisions. . Branches It has no branches It has several branches, e. G. , financial accounting, managerial accounting, cost accounting etc. In spite of above mentioned points of difference between bookkeeping and accounting, bookkeeping is a part of accounting. Therefore, it cannot be separated from the accounting. We can say that both bookkeeping and other. Therefore such statement that accounting begins where bookkeeping ends is wrong and misleading. If bookkeeping is used to mean the subject, it will be incomplete unless it is used as bookkeeping and accounting. Accounting concepts: Four important accounting concepts underpin the preparation of any set of accounts: Going Concern Accountants assume, unless there is evidence to the contrary, that a company is not going broke. This has important implications for the valuation of assets and liabilities. Consistency Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year.
Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change. Prudence Profits are not recognized until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (the are “provided for” in the accounts” as soon as their is a reasonable chance that such costs will be incurred in the future. Matching (or “Accruals”) Income should be properly “matched” with the expenses of a given accounting period. Accounting conventions: The most commonly encountered convention is the “historical cost convention”.
This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. Under the “historical cost convention”, therefore, no account is taken of changing prices in the economy. The other conventions you will encounter in a set of accounts can be summarized as follows: Monetary Accountants do not account for items unless they can be quantified in monetary arms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc.
Separate Entity This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business. Realization With this convention, accounts recognize transactions (and any profits arising from them) at the point of sale or transfer of legal ownership – rather than Just when cash actually changes hands. For example, a company that makes a sale to a customer can recognize that sale when the transaction is legal – at the point of contract.
The actual payment due from the customer may not arise until several weeks (or months) later – if the customer has been granted some credit terms. Materiality An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of Judgment. Where decisions are required about the appropriateness of a particular accounting Judgment, the “materiality” convention suggests that this would only be an issue if the Judgment is “significant” or “material” to a user of the accounts.
The concept of “materiality” is an important issue for auditors of financial accounts. Basis of accounting: There are two bases for accounting of business transactions. That are as follows: 1/ Accrual basis or mercantile system of accounting. It is a system of classifying and summarizing transactions into assets, liabilities, capital, cost and resources and recording there of. A transaction is recognized when either a liability or asset is created or impaired. Whether payment is made or received is immaterial in accrued Asia accounting.
The following are the essential features of accrual basis: Revenue is recognized as it is earned. Costs are matched either against revenues so recognized or against the relevant time period to determine periodic income. Costs which are not charged to income are carried forward and are kept under continuous review. Any cost that appears to have lost its utility or its power to generate future revenue is written off as loss. 2/ cash basis of accounting. It is a basis of accounting by which a transaction is recognized only if cash is received or paid.
However, accrual basis of accounting is the only nearly accepted accounting method for business organization which are supposed to operate for a long period. Cash basis of accounting is suitable for such business organizations which operate for a short term duration. 6 relationship of accounting with other disciplines: Relationship of Accounting with Economics Proof. Robbins has defined term ‘economics’ as follows: “Economics is the science, which studies human behavior as a relationship between ends and scarce means which have alternatives uses. However when a person is to take any economical decision, he has to depend mainly on the accounting information. Generally an accountant is concerned with the economic problems of an only one enterprise only, but an economist is concerned with the problems of an industry as a whole. Micro levels data, arranged by the accounting system, is summed up to get macro level data base. Thus at the macro level, accounting provides the basic data, upon which the economic models are developed.
However, there exists a wide gulf between economists’ and accountants’ concept of income and capital For example, the profit according to an economist is not same thing as the profit according to an accountant. No doubt, accountants have derived the ideas of value, income and capital maintenance from economists, but suitably modified to make them usable in practical circumstances. Thus, Economics and Accounting are close related subjects. Relationship of Accounting with Mathematics Knowledge of arithmetic and algebra is a pre-requisite for accounting computations and measurements.
Calculations of interest and annuity etc. Are some examples of fundamental uses of mathematics in accounting. Presently graphs and charts are being widely used for communicating accounting information to the users. Thus the knowledge in geometry and trigonometry has become essential to have a better understanding about the accounting communication system. Relationship of Accounting with Statistics Collection, Tabulation, Analysis and presentation of data are some primary functions, which are performed by both Accountants and statisticians.
The accountant is mainly concerned with the monetary data, although to some extent, he is also concerned with the quantitative data. But a statistician is concerned equally with the monetary and quantitative data. The use of statistics is accounting can be appreciated better in he context of the nature of accounting records. Accounting information is very precise; it is exact to the last paisa. But for decision-making purposes, such precision is not necessary and hence the statistical approximations are sought. Accounting longer period is taken.
For example, a longer period will be required to fit the trend line. Statistical methods are helpful in developing accounting data and in their interrelation. Therefore the study and application of statistical methods will add extra edge to the accounting data. Relationship of Accounting with Law Every business house has to work within legal environment. All the transactions with suppliers and customers are governed by the Contract Act, Sale of Goods Act, Negotiable Instruments Act, etc. The entity, itself, created and controlled by laws.
For example a partnership business is controlled by Partnership Act, a company is created and controlled by the Companies Act. Very often the accounting system to be followed has been prescribed by the law. For example the Companies Act has prescribed the format of financial statements. However legal prescription about the accounting system is the product of development in accounting knowledge. That is to say legislation about accounting system cannot be enacted unless there is a corresponding development in the accounting discipline. In what way, accounting influences law and is also influenced by law.
Relationship of Accounting with Management Management is a broad occupational field, which comprises many functions and application of many disciplines including statistics, mathematics, economics, etc. Accountants are well placed in the management and play a key role in the management them. A large portion of accounting information is prepared for management decision-making. In the management team, an accountant is in a better position to understand and use such data. In other words, since an accountant plays an active role in management, he understands the data requirement.
So, accounting system can be molded to serve the management purpose. 7 role of accountant in society: There are many types of profession in the world which are held in high esteem in public eyes and there is no denying the fact that the accounting profession in one of them. At the core of all types of learned profession, there is the desire of public good and of finding the best way to serve society. By the help of science of accountancy and the spell of its art, a dynamic pattern which assists business in planning its future is cane by accountants out of the inert mass on non-speaking silent fugues.
This makes their profession an instrument of socio-economic change and welfare of the society. An accountant with the help of his education, training, analytical mind and experience is best qualified to provide multiple need-based services to the ever growing society. The accountants of these days can do full Justice not only to matters relating to taxation, costing, management accounting, financial lay out, company isolation and procedures but they can delve deep into the fields relating to financial policies, budgetary policies and even economic principles.
The area of activities which can be undertaken by the accountants is not limited but it can also cover many additional facets. Functions of Accountant: 1 . Maintenance of Accounting Books: An accountant is able to maintain a systematic record of financial transactions entered into during a period and to state the financial position of the concern as at a particular date. For the fulfillment of the twin objective of ascertaining the profit earned or loss suffered and the financial position, it is one only by an accountant.
Appropriate maintained accounting books assists management in planning, decision making, and controlling functions. 2. Audit: Every limited company is required to appoint a chartered accountant as an auditor who is statutorily required to report every year whether in his opinion the balance sheet shows a true and fair view or the state of affairs on the balance sheet date, and the profit and loss account shows a true and fair view of the profit or loss for the year. . Internal Audit: It is a management tool whereby an internal auditor thoroughly examines the accounting transactions and also the system, according to which these have been recorded with a view to ensure the management that the accounts are being properly maintained and the system contains adequate safeguards to check any leakage of revenue or misappropriation of property or assets and the operation have been carried out in conformity with the plans of management. 4.
Taxation: An accountant can handle taxation matters of a business or a person and he can represent that business or person before the tax authorities and settle the tax liability under the statute prevailing. He can also assist in avoiding or reducing tax burden by proper planning of tax affairs. Accountant also have social obligation to express their views on broad tax policy, on the effect of tax rate on the economy in general and on all other aspects of taxation in which they have knowledge superior to that of the general public. . Consultancy services: Accountant performs an advisory function. He is largely responsible for internal reporting to the management for planning and controlling current operations, decision making on special matters and for formulating long range plans. His Job is to collect, analyze, interpret and present al accounting information which is useful to the management.
Accountant provides management consultancy services in the areas of management information system, expenditure control and evaluation of appraisal techniques for new investments and disinvestment, working capital management, corporate planning etc. The practice of accountancy has crossed its usual domain of preparation of financial statements, interpretation of such statements and audit thereof. Accountants are presently taking active role in company laws and other corporate legislation matters, in taxation laws matter and in general management problems.
