Accounting is the process of recording, classifying and summarizing financial transactions of a business in such a manner that the results of its operations and its financial position can be ascertained at the end of a given period, and interpreting and communicating them to the users.
This note has information about accounting, its features and scope.
The concept of accounting is broader than book keeping. Accounting is concerned with the act of recording, classifying and summarizing the financial transactions of a business to know its profit or loss and financial positionwhere as book-keeping is concerned only with the act of recording the financial transactions systematically.
The following are some of the main definitions of accounting:
"An accounting system is a means of collecting, summarizing, analyzing and reporting in monetary terms, information about the business." -R. N. Anthony
"Accounting may be seen as consisting of recording, classification, presentation and interpretation of financial information." -Lewis and Gillespie
Features of Accounting
The following are the features of accounting:
Financial character Accounting deals only with the financial transactions. Any transactions that is not considered as accounting which is not expressed in monetary terms.
Continuous process Accounting is a process of recording, classifying and summarizing a financial transaction regularly in a systematic manner. it is an continuous process.
Analysis and interpretation Accounting also helps to analysis and interpret the result of the business from the data found in financial statements of the business. It finds the conclusions about the profitability and financial position.
Historical in nature Accounting keeps the records of those transaction which is historical in nature.
Based on principle Accounting is based on certain principles. This principle guided how transactions should be recorded and reported.
Objectives or Functions of Accounting
The following are the objectives of accounting:
To keep complete and systematic record The objective of the accounting is to keep a record of all financial transactions in a systematic manner. The recorded transaction is used for future reference and also to avoid the possibility of errors and frauds.
To ascertain profit or loss To ascertain the profit or loss of the organization at the end of the accounting period is the objective of the accounting.
To analyze and interpret the financial information Accounting provides different important information to the users about the operating results and financial position of the business which helps them to take financial decision.
To help in determination of tax liability Every organization needs to pay taxes to the government. So, the accounting provides necessary information which helps to determine the amount of tax liability.
To depict the financial position Accounting prepares a statement called balance sheet which is the statement of capital, liabilitiesand assets of the business. This helps to know the financial position of the business.
Scope of Accounting
The scope of accounting is very wide. Generally, it covers the following areas:
Accounting for business organizations Business organizationsis established with the objective of earning profit. So, it is important for them to known the profit and loss of the organization. Therefore, accounting is useful for determining profits or losses of such organizations.
Accounting for non-trading organizations Non-trading organizationslike hospitals, clubs, societies, educational institutions etc. are established to provide services to the general public. The non-trading organization also have to prepare ‘Income and Expenditure Account’ to present their incomes and expenditures for a particular period. They also prepare balance sheet to know their financial position. So, accounting helps to records all those expenditure and income and show the financial position.
Accounting for government The government has the biggest responsibility for providing welfare, services, peace, security, justice, etc., to the people. For this, the government uses several financial resources. Accounting system which is used in government organizations is known as ‘Government Accounting’.
Accounting for non-government organizations Non-government organization also plays important role in the development of the country. The accounting system which is used in non-government organization is known as 'Fund Accounting'.
Accounting for professionals and individuals Accounting is also useful to the professionals and individuals to exhibit their professional and personal efficiency. Professionals are engaged in the job of specialized knowledge and skills, called professional skills such as medical, engineering, accounting, research etc. Similarly, individuals are also engaged in financial activities for the maintenance of life. Professionals need accounting to measure their accounting activities and for tax purpose while individuals need accounting for personal financial decisions.
Importance or Advantages of Accounting
The importance or advantages of accounting are as follows:
Complete record Accounting facilitates the replacement of human memory by maintaining the complete record of financial transactions. Human memory is limited by its very nature. Accounting helps to overcome this limitation.
Knowledge of profitability Accounting prepares the Profit and Loss Account or Income Statement which hepls to ascertain the profit and loss of the organization.
Knowledge of financial position Accounting prepares Balance Sheet or Position Statement which helps to find the financial position of the organization.
Reduction in errors Accounting record all financial transactions scientifically and systematically which finds errors and frauds that took place in the organization and also take steps to prevent them.
Helpful in decision-making Accounting provides different important informations that can be used to take decisions for future. Similarly, accounting helps the management in planning and controlling business activities.
Availability of information Accounting communicate information to the management, creditors, employees and the government to serve the onterest of a business as a whole.
Things to remember
Accounting is concerned with the act of recording, classifying and summarizing the financial transactions of a business to know its profit or loss and financial position.
Accounting deals only with those transactions which have financial character.
Accounting also involves analysis and interpretation of the result of the business.
Accounting facilitates the replacement of human memory by maintaining a complete record of financial transactions.
It includes every relationship which established among the people.
There can be more than one community in a society. Community smaller than society.
It is a network of social relationships which cannot see or touched.
common interests and common objectives are not necessary for society.
The advantages of accounting are explained below:-
Accessing the performance of the business Accounting keeps a proper and systematic record of all business transactions. The income statement is prepared with these records and we are able to know the profit earned and the loss suffered by the business.
Documentary evidence Accounting records can be used as an evidence in the court to substantiate the claim of the business. These records are based on documentary proof. In this way, the court accepts these records as evidence.
Facilitating the sale of the business The position statement of the business shows the value of assets and liabilities of the business. Accounting facilities in the calculation of the consideration for which the business should be sold.
To analyze and interpret the financial information It analyzes and interprets the result of the business to draw conclusions with the help of such conclusions the parties concerned in the business can have full information about its profitability and financial position.
To help in determination of tax liability Business has to pay different types of tax to the government. It provides the financial information to tax authorities to determine tax liability.
To depict the financial position A concern, whether trading or non-trading should know it’s true financial positions. For this purpose, it prepares a balance sheet at the end of every year which informs about its positions of assets, liabilities and capital and reflects the economic strength and weaknesses of the business.