Friday, December 16, 2011
Objects of Accounting
Following are some of the most important objects of accounting : 1. Financial Information: Financial information is necessary in order to run a business in an efficient manner. Reliable information will be available only through keeping proper books of accounts. 2. Borrowings from Money Lenders: Proper accounting is essential, if money is to be borrowed for the purpose of business . The lender will only agree to lend money when he is satisfied as to the solvency of the borrower. Information available from books of accounts is the means of measuring such solvency. 3. Verification of Cash: Cash in hand can be verified and any defalcation can be detected, if proper books of accounts are maintained. 4. Payment of Tax: Payment of sales tax and income tax is only possible if books of accounts are maintained. 5. Dispute Settlement: In case of any dispute, books of accounts can be produced in the court of law as a documentary evidence. 6. Government Requirements and Policies: Government fixes up fair prices , formulates industrial policy, prepares economic plans, decides import-export quotas and does many other functions on the basis of accounting information available from books of accounts.
Branches of Accounting
In order to meet the ever increasing demands made on accounting by different interested parties (such as owners, management, creditors, taxation authorities and other govt. agencies etc.) the various branches of accounting have come into existence. These branches are as follows: 1. Financial accounting 2. Cost accounting 3. Managerial accounting The above three branches of accounting are briefly discussed below: 1. Financial Accounting: The main purpose of financial accounting is to ascertain the true result (profit or loss) of the business operations during a particular period of time and to state the financial position of the business on a particular point of time. Financial accounting produces general purpose reports for the use by the great variety of people who are interested in the organization but who are not actively engaged in its day-to-day operation. 2. Cost Accounting: The main object of cost accounting is to determine the cost of goods manufactured or produced by the business. It also helps the management of the business in controlling the costs by indicating avoidable losses and wastes. In order to set prices of the products of the companies, correct calculation of all manufacturing as well as non-manufacturing costs is necessary. Cost accounting is also helpful to accomplish this task. 3. Managerial Accounting: The object of managerial accounting is to communicate the relevant information periodically to the management of the business to enable it to take suitable decisions. Financial accounting is the oldest and the other branches have developed from it according to the need of different parties. The objects of financial accounting can only be achieved by recording business transactions in a systematic manner according to a set of principles.
Thursday, December 15, 2011
Bookkeeping Vs Accounting Vs Accountancy
Bookkeeping Versus Accounting:
A great deal of efforts goes into gathering and processing information about a concern before the facts end up in an accounting report. Much of the work required is clerical in nature and can be performed by office workers, machine and computers. The functions of Bookkeeping is to properly record the financial transactions in the books of account. But the function of accounting is more extensive. It has many other functions to do except recording transactions, e.g. classification, summarization and interpretation of transactions. Thus we see the Bookkeeping is confined to recording aspect of accounting. It is a small and simplest part of accounting. Both represent two different phases of the main subject "accountancy". Bookkeeping is the first stage, while accounting is the final stage, that is why, it is said that accounting starts where bookkeeping ends. The function of bookkeeping ends with the recording of transactions inthe books of accounts. But the function of accounting is to classify the recorded transactions, summarize them, interpret them, and collect and communicate necessary information to the management and other interested persons. Management performs its function on the basis of this information, e.g. laying downrules and regulations, taking so many vital decisions etc. Thus we may say that the function of bookkeeping is primarily of clerical in nature, while that of accounting is concerned with organizational and administrative matters. It is more important and responsible.
Apparently the functions of bookkeeping seem to be less important than accounting, but its necessity can hardly be denied. Just an article cannot be produced without raw material, similarly accounting function cannot be done without obtaining necessary data from bookkeeping. Again, If there is any defect in raw material the article produced out of it will also be defective. Similarly, if there be any error or mistake in bookkeeping, the accounting job will also be wrong and create anomalous situation. Thus we can conclude that bookkeeper performs the routine, repetitive tasks of collecting and processing financial information. Accountants are responsible for designing the systems within which bookkeepers work; supervising the day to day work of bookkeepers; recording unusual and complex transactions, preparing, analyzing and interpreting accounting reports; auditing the records; and performing a variety of other complex accounting activities.
Accounting Versus Accountancy:
The two words accounting and accountancy are often used to mean the same thing. But it is not correct. Accountancy is the main subject accounting is one of its branches. The word "accountancy" is far extensive; i.e. the scope of accountancy is far a wide and extensive compared to accounting. It covers the entire body of theory and practice, e.g. bookkeeping, accounting, costing, auditing, taxation etc.
A great deal of efforts goes into gathering and processing information about a concern before the facts end up in an accounting report. Much of the work required is clerical in nature and can be performed by office workers, machine and computers. The functions of Bookkeeping is to properly record the financial transactions in the books of account. But the function of accounting is more extensive. It has many other functions to do except recording transactions, e.g. classification, summarization and interpretation of transactions. Thus we see the Bookkeeping is confined to recording aspect of accounting. It is a small and simplest part of accounting. Both represent two different phases of the main subject "accountancy". Bookkeeping is the first stage, while accounting is the final stage, that is why, it is said that accounting starts where bookkeeping ends. The function of bookkeeping ends with the recording of transactions inthe books of accounts. But the function of accounting is to classify the recorded transactions, summarize them, interpret them, and collect and communicate necessary information to the management and other interested persons. Management performs its function on the basis of this information, e.g. laying downrules and regulations, taking so many vital decisions etc. Thus we may say that the function of bookkeeping is primarily of clerical in nature, while that of accounting is concerned with organizational and administrative matters. It is more important and responsible.
Apparently the functions of bookkeeping seem to be less important than accounting, but its necessity can hardly be denied. Just an article cannot be produced without raw material, similarly accounting function cannot be done without obtaining necessary data from bookkeeping. Again, If there is any defect in raw material the article produced out of it will also be defective. Similarly, if there be any error or mistake in bookkeeping, the accounting job will also be wrong and create anomalous situation. Thus we can conclude that bookkeeper performs the routine, repetitive tasks of collecting and processing financial information. Accountants are responsible for designing the systems within which bookkeepers work; supervising the day to day work of bookkeepers; recording unusual and complex transactions, preparing, analyzing and interpreting accounting reports; auditing the records; and performing a variety of other complex accounting activities.
Accounting Versus Accountancy:
The two words accounting and accountancy are often used to mean the same thing. But it is not correct. Accountancy is the main subject accounting is one of its branches. The word "accountancy" is far extensive; i.e. the scope of accountancy is far a wide and extensive compared to accounting. It covers the entire body of theory and practice, e.g. bookkeeping, accounting, costing, auditing, taxation etc.
Accounting as a Language of Business
Accounting is a language, a system that communicates information. It is often referred to as the language of the business, although it is just as important in the operation of government agencies, clubs, and other kind of organizations.
You probably have some idea already of what the term accounting means. It is frequently used in every day conversation to mean "answer for responsibility." Managers of business concerns are answerable to owners, creditors, labor unions and government agencies etc. Managers of government units are answerable to chief executives, boards, taxpayers and others. In fact, accounting was developed by people, who were seeking better ways together and report useful information and organizations.
Some type of orderly system is needed to accounting for an organization of any size and complexity. An accounting system is used to collect, process and report needed data about a business, government unit, or other type of association. Information is usually collected, processed and reported in financial terms, which simply means that 'money' is the bases of measurement.
Many authors have defined the term "Accounting" in different ways. There is difference of opinion among the authors as to its precise definition as the term accounting is so broad that it is difficult to give precise definitions. However, several possible definitions are given below:
1.
"The act of collecting, processing, reporting, analyzing, interpreting and projecting financial information."
2.
"The system of providing of quantified information about an organization to people who need such information."
3.
"The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of information."
Of all the definitions available the most accepted is the given by the American Institute of Certified Public Accountants Committee on Terminology According to it.
"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." An analysis of the definition will enable us to have a thorough idea of the functions of accounting. The salient features of the definition are:
1. Connected with a money event or transaction.
2. Transactions are process in three different stages.
1. Connected with a Money Event Or Transaction:
Accounting must be in relation to a monetary event or transaction and the event or transaction must be measurable in terms of money. In other words, no accounting is possible for an event or transaction which is not measurable in term of money, e.g. passing an examination, delivering lecture in a meeting, winning a game etc. There are events no doubt, but since these are not measurable in term of money, there is no question of their accounting.
2. Transactions Are Processed In Three Different Stages:
(a) Recording:
In the first stage the transactions are recorded chronologically in the books of accounts.
(b) Classifying:
In the second stage the transactions of the same or similar nature are classified and recorded separately.
(c) Summarizing:
In the third stage all necessary data and information are summarized on the basis of classified record of transactions and communicated to management and other interested persons.
(d) Interpretation:
In order to ascertain the true position of a concern all the accounting data and information relating to it are analyzed and interpreted.
All the above functions are performed on the basis of certain well-defined and well-coordinated rules and principles. An accountant must be familiar with all these rules and principles.
Bookkeeping:
Bookkeeping is the art of recording monetary transactions in the books of account in a proper manner.The books of accounts are recorded in such a way as will enable us to ascertain the complete and accurate result in the least possible time with minimum labor and cost.
Many authors have defined the terms "bookkeeping" in different ways.
1.
"Bookkeeping" means the recording of transactions, the record making phase of accounting (it is only a small part of the field of accounting and probably the simplest part." - Meigs, Johnson and Meigs.
2.
"Bookkeeping is the recording branch of accounting." - Encyclopaedia Britannica.
3.
"Bookkeeping is the art of recording in books of account the monetary aspect of commercial or financial transactions."
You probably have some idea already of what the term accounting means. It is frequently used in every day conversation to mean "answer for responsibility." Managers of business concerns are answerable to owners, creditors, labor unions and government agencies etc. Managers of government units are answerable to chief executives, boards, taxpayers and others. In fact, accounting was developed by people, who were seeking better ways together and report useful information and organizations.
Some type of orderly system is needed to accounting for an organization of any size and complexity. An accounting system is used to collect, process and report needed data about a business, government unit, or other type of association. Information is usually collected, processed and reported in financial terms, which simply means that 'money' is the bases of measurement.
Many authors have defined the term "Accounting" in different ways. There is difference of opinion among the authors as to its precise definition as the term accounting is so broad that it is difficult to give precise definitions. However, several possible definitions are given below:
1.
"The act of collecting, processing, reporting, analyzing, interpreting and projecting financial information."
2.
"The system of providing of quantified information about an organization to people who need such information."
3.
"The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of information."
Of all the definitions available the most accepted is the given by the American Institute of Certified Public Accountants Committee on Terminology According to it.
"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." An analysis of the definition will enable us to have a thorough idea of the functions of accounting. The salient features of the definition are:
1. Connected with a money event or transaction.
2. Transactions are process in three different stages.
1. Connected with a Money Event Or Transaction:
Accounting must be in relation to a monetary event or transaction and the event or transaction must be measurable in terms of money. In other words, no accounting is possible for an event or transaction which is not measurable in term of money, e.g. passing an examination, delivering lecture in a meeting, winning a game etc. There are events no doubt, but since these are not measurable in term of money, there is no question of their accounting.
2. Transactions Are Processed In Three Different Stages:
(a) Recording:
In the first stage the transactions are recorded chronologically in the books of accounts.
(b) Classifying:
In the second stage the transactions of the same or similar nature are classified and recorded separately.
(c) Summarizing:
In the third stage all necessary data and information are summarized on the basis of classified record of transactions and communicated to management and other interested persons.
(d) Interpretation:
In order to ascertain the true position of a concern all the accounting data and information relating to it are analyzed and interpreted.
All the above functions are performed on the basis of certain well-defined and well-coordinated rules and principles. An accountant must be familiar with all these rules and principles.
Bookkeeping:
Bookkeeping is the art of recording monetary transactions in the books of account in a proper manner.The books of accounts are recorded in such a way as will enable us to ascertain the complete and accurate result in the least possible time with minimum labor and cost.
Many authors have defined the terms "bookkeeping" in different ways.
1.
"Bookkeeping" means the recording of transactions, the record making phase of accounting (it is only a small part of the field of accounting and probably the simplest part." - Meigs, Johnson and Meigs.
2.
"Bookkeeping is the recording branch of accounting." - Encyclopaedia Britannica.
3.
"Bookkeeping is the art of recording in books of account the monetary aspect of commercial or financial transactions."
Need and Importance of Accounting
We live in a world where people need things from the day they are born to the day that they die. Some of these "need" are physical needs, a need for goods of various sorts, food, clothing, shelter, and so on. Some of them are emotional"wants", a need for education, entertainment, or recreation. In satisfying such needs businessmen perform useful services to their fellow humans. In return they expect to earn a responsible reward for their efforts in the form of profits .
"Cut your coat according to your cloth" - so goes the saying. Even a king becomes a pauper, if he fails to exercise economy inhas expenditures. In other words, every individual will have to plan his expenditure according to his income. Obviously the question arises - why is this planning necessary? The need for such planning arises as our wants or desires on needs for goodsand services are unlimited, while the means, i.e. the income with which to buy such goods and services are limited. Where, however, goods and services are available free of cost, i.e. gifts of nature, such as air, water (not in cities) etc. there is no question of economy. But the necessity of economy is undeniable, where goods or services are not available free of cost and their supply is limited.
A proper and fair planning of expenditures helps us to ensure proper use of our income. Of course it is true that the quantity of goods or money cannot be increase by making a proper planning. But certainly we can ensure most economic use of goods or money at our disposal.
Most of us do maintain somekind of a written record of our income and expenditure. The idea behind maintaining such record is to know the correct position regarding income and expenditure. The need for keeping a record of income and expenditure in a clear and systematic manner has given rise to the subject of " bookkeeping ".
Some individuals do not recognize the necessity of keeping accounts of there day to day expenditure, since they spend their own income and are not required to account for it to any body. But such an idea is wrong. A family, however, small it may be, must exercise proper control over its expenditures as to ensure future security. A family has two-fold responsibilities - one is that of ensuring all round welfare of the family and the other is the social responsibility. Needless to say, money is the most essential pre-request for ensuring peace and happiness of a family, which each and every member desires. The quantum of money must be adequate in relation to the needs. But mere adequacy of money will not do; one has to take care of its proper utilization. For this it would be necessary to exercise economy and maintain proper books of accounts. On the other hand each and every family must save a portion of its income for future contingencies. It is possible to increase the amount of savings through proper management and effective control of the family expenses. Through such saving the family helps materializing the economic planning of the country.
It is all the more necessary for an organization or a concern to keep proper accounts. At the end of the year the true result of the economic activities of a concern must be made available otherwise it will not be possible to run the concern. In case of a business concern the profit or loss at the end of a year must be ascertained, because, the amount of profit must be adequate in relation to that of investment made in the business. If it is not so or if there is a loss, it is an indication of some defects existing some where in the management of the business. All such defects need to be detected and analyzed and appropriate measures taken for their rectification. But it is only possible, if proper books of accounts are maintained in the business concern. So, the importance of bookkeeping to a business is the same as that of fresh air to a man to exist. Without bookkeeping records a business would meet death, through not instantly, but in a shorttime.
Moreover, if proper books of accounts are not kept in a business, the amount of profit cannot be ascertained and it will not be possible to distribute the profit among the owners of the business.The income tax dues to the government cannot also be paid. In the absence of books of accounts misuse or defalcation of money will remain undetected. The owner and other parties interested will not be able to have any information about the condition of the business. For the same reason in the case of non-trading concerns like schools, clubs, colleges, universities, hospitals etc. the need for accounting is universally recognized.
Thus we see that the necessity of keeping accounts is not only confined to business concerns but it is also useful for all classes and grades of people and organizations.
"Cut your coat according to your cloth" - so goes the saying. Even a king becomes a pauper, if he fails to exercise economy inhas expenditures. In other words, every individual will have to plan his expenditure according to his income. Obviously the question arises - why is this planning necessary? The need for such planning arises as our wants or desires on needs for goodsand services are unlimited, while the means, i.e. the income with which to buy such goods and services are limited. Where, however, goods and services are available free of cost, i.e. gifts of nature, such as air, water (not in cities) etc. there is no question of economy. But the necessity of economy is undeniable, where goods or services are not available free of cost and their supply is limited.
A proper and fair planning of expenditures helps us to ensure proper use of our income. Of course it is true that the quantity of goods or money cannot be increase by making a proper planning. But certainly we can ensure most economic use of goods or money at our disposal.
Most of us do maintain somekind of a written record of our income and expenditure. The idea behind maintaining such record is to know the correct position regarding income and expenditure. The need for keeping a record of income and expenditure in a clear and systematic manner has given rise to the subject of " bookkeeping ".
Some individuals do not recognize the necessity of keeping accounts of there day to day expenditure, since they spend their own income and are not required to account for it to any body. But such an idea is wrong. A family, however, small it may be, must exercise proper control over its expenditures as to ensure future security. A family has two-fold responsibilities - one is that of ensuring all round welfare of the family and the other is the social responsibility. Needless to say, money is the most essential pre-request for ensuring peace and happiness of a family, which each and every member desires. The quantum of money must be adequate in relation to the needs. But mere adequacy of money will not do; one has to take care of its proper utilization. For this it would be necessary to exercise economy and maintain proper books of accounts. On the other hand each and every family must save a portion of its income for future contingencies. It is possible to increase the amount of savings through proper management and effective control of the family expenses. Through such saving the family helps materializing the economic planning of the country.
It is all the more necessary for an organization or a concern to keep proper accounts. At the end of the year the true result of the economic activities of a concern must be made available otherwise it will not be possible to run the concern. In case of a business concern the profit or loss at the end of a year must be ascertained, because, the amount of profit must be adequate in relation to that of investment made in the business. If it is not so or if there is a loss, it is an indication of some defects existing some where in the management of the business. All such defects need to be detected and analyzed and appropriate measures taken for their rectification. But it is only possible, if proper books of accounts are maintained in the business concern. So, the importance of bookkeeping to a business is the same as that of fresh air to a man to exist. Without bookkeeping records a business would meet death, through not instantly, but in a shorttime.
Moreover, if proper books of accounts are not kept in a business, the amount of profit cannot be ascertained and it will not be possible to distribute the profit among the owners of the business.The income tax dues to the government cannot also be paid. In the absence of books of accounts misuse or defalcation of money will remain undetected. The owner and other parties interested will not be able to have any information about the condition of the business. For the same reason in the case of non-trading concerns like schools, clubs, colleges, universities, hospitals etc. the need for accounting is universally recognized.
Thus we see that the necessity of keeping accounts is not only confined to business concerns but it is also useful for all classes and grades of people and organizations.
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