Accounting Principles (Meaning And Scope of Accounting)

 

Accounting Principle (Meaning And Scope of Accounting)

INTRODUCTION:

 Accounting Principles are related to every individual life, they perform some kind of economic activity daily. Which is related to these accounting concepts. A salaried person gets a salary and spends to buy provisions and clothing, for children’s educations, construction of the house, and other necessary product. A social club formed by a group of individuals, a business run by an individual or a group of individuals, a local authority body like WBBSE, WBCHSE, CBSE, Municipal Corporation, Governments, either Central or State. All are carrying some economic activities. Such economic activities may create social benefit i.e., benefit for the whole population, at large. Anyway, such economic activities are performed through “transaction and event”. The transaction is used to mean a business performance of an act, an agreement while the event used to mean a happening, as a consequence of the transaction, a result.

 Examples: An individual invests 300000 for starting a Food Shop. On 1 April, he purchases goods for 200000 and sells for 230000during the month of April. He pays shop rent for the month 10000 and Staff salaries 15000, after that he finds that still, he has goods worth 25000 in hand. The individual performs an economic activity. He carries on a few transitions and encounters with some events during the economic activities.

 we see the individual, who starting the Food Shop. How much he earns the surplus during the Economic Activity period.

PARTICULARS	Amount	Amount
Goods Sold Goods in hand   Less:    Goods Purchased             Pay Shop Rent             Staff Salaries   Surplus	200000 10000 15000	230000 25000
		255000       (225000)
		30000

 

Earning of 30000 surpluses is an event; also having the individuals in hand is another the event, while purchasing and sale of goods, investment of money and payment of rent is a transaction.

Similarly, Your Father’s Salary is 50000. He purchases a laptop for you @ 35000, and the balance in hand of your father is 15000. These are also transactions and events.

MEANING OF ACCOUNTING

As per the American Institute of Certified Public Accountants formulated the following definition of accounting in 1961:

“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 the result thereof.”

“The the function of accounting is to provide quantitative information, primarily of financial nature, about economic entities, that is needed to be useful in making economic decisions.”

 

PROCEDURAL ASPECTS OF ACCOUNTING

Generating Financial information:

RECORDING: This is the basic function of accounting. All business transactions of a financial character, as evidenced by some documents such as sales bills. Passbook, salary slip, etc. are recorded in the books of account, Recording is done in a book called “Journal”.

CLASSIFYING: Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place so as to put information in compact and usable form. The book containing classified information is called “Ledger”.

SUMMARISING: It is concerned with the preparation and presentation of the classified data in a manner useful to the internal as well as the external users of financial statements.

ANALYSING: The term ‘Analysis’ means the methodical classification of the data given in the financial statement.

INTERPRETING: This is the final function of accounting. It is concerned with explaining the meaning and significance of the relationship as established by the analysis of accounting data. The recorded financial data is analysed and interpreted in a manner that will enable the end-users to make a meaningful judgment about the financial condition and profitability of the business operations.

COMMUNICATING: It is concerned with the transmission of submission of summarised, analysed and interpreted information of the end-users to enable them to make rational decisions.

OBJECTIVE OF ACCOUNTING

 Systematic recording of transactions: The basic objective of accounting is to systematically record the financial aspects of business transactions i.e., book-keeping. These recorded transactions are later on classified and summarized logically for the preparation of financial statements and for their analysis and interpretation.

Ascertainment of results of above-recorded transactions: Accountant prepares profit and loss accounts to know the results of business operations for a particular period of time. If revenue exceeds expenses, then it is said that the business is running profitably but if expenses exceed revenue, then it can be said that the business is running under loss. The profit and loss account helps the management and different stakeholders in taking rational decisions. For example, if the business is not proved to be remunerative or profitable, the cause of such a state of affairs can be investigated by the management for taking remedial steps.

Ascertainment of the financial position of the business: A businessman is not only interested in knowing the results of the business in terms of profits or loss for a particular period but is also anxious to know that what he owes (liability) to the outsiders and what he owns (assets) on a certain date. To know this, an accountant prepares a financial position statement popularly known as the Balance Sheet. The balance sheet is a statement of assets and liabilities of the business at a particular point in time and helps in ascertaining the financial health of the business.

Providing information to the users for rational decision-making: Accounting as a 'language of businesses communicates the financial results of an enterprise to various stakeholders by means of financial statements. Accounting aims to meet the information needs of the decision-makers and helps them in rational decision-making.

To Know the Solvency Position: By preparing the balance sheet, management not only reveals what is owned and owed by the enterprise, but also it gives the information regarding concern’s ability to meet its liabilities in the short-run (Liquidity Position) and also in the long run (Solvency position) as and when they fall due.

 THE MAIN FUNCTIONS OF ACCOUNTING

MEASUREMENT: Accounting measures past performance of the business entity and depicts its current financial position.

FORECASTING: Accounting helps in forecasting future performance and financial position of the enterprise using past data and analyzing trends.

DECISION-MAKING: Accounting provides relevant information to the users of accounts to aid rational decision-making.

COMPARISON & EVALUATION: Accounting assesses performance achieved in relation to targets and discloses information regarding accounting policies and contingent liabilities which play an important role in predicting, comparing and evaluating the financial results.

CONTROL: Accounting also identifies weaknesses of the operational system and provides feedbacks regarding the effectiveness of measures adopted to check such weaknesses.

GOVERNMENT REGULATION AND TAXATION: Accounting provides necessary information to the government to exercise control on the entity as well as in collection of tax revenues.

BOOK-KEEPING

Book-keeping is an activity concerned with the recording of financial data relating to business operations in a significant and orderly manner. It covers procedural aspects of accounting work and embraces the record-keeping function. Obviously, book-keeping procedures are governed by the end product, the financial statements. The term 'financial statements' means Profit and Loss Account, Balance Sheet, and cash flow statements including Schedules and Notes forming part of Accounts.

Book-keeping also requires a suitable classification of transactions and events. This is also determined with reference to the requirement of financial statements. A bookkeeper may be responsible for keeping all the records of a business or only of a minor segment, such as the position of the customers' accounts in a departmental store. Accounting is based on a careful and efficient book-keeping system.

 

RELATIONSHIP OF ACCOUNTING AND BOOK-KEEPING:

Some people mistake book-keeping and accounting to be synonymous terms, but in fact they are different from each other. Accounting is a broad subject. It calls for a greater understanding of records obtained from book-keeping and an ability to analyses and interpret the information provided by book-keeping records. Book-keeping is the recording phase while accounting is concerned with the summarizing phase of an accounting system Rook-keeping provides necessary data for accounting and accounting starts were book-keeping ends.

DISTINCTION BETWEEN BOOK-KEEPING AN ACCOUNTING
Book-keeping	Accounting
It is a process concerned with recording of transactions.   It constitutes a base for accounting. Financial statements do not form part of this process. Managerial decisions cannot be taken with the help of these records.   There is sub-field book-keeping.   The financial position of the business cannot be ascertained through book-keeping records.	It is a process concerned with summarizing the recorded transactions. It is considered as a language of the business. Financial statements are prepared in this process on the basis of book-keeping records. Management makes decisions on the basis of these records. It has several sub-fields like financial accounting and management accounting, management accounting, etc. The financial position of the business is ascertained on the basis of the accounting reports.