CPT Accounting Fundamentals Notes 1

 

CHAPTER 1

 

MEANING & SCOPE OF ACCOUNTING

 

Basics of Accounting
  • The aim of accounting is to meet the information needs of the rational & sound decision makers & thus it’s known as language of business.
  • Definition of Accounting- “The process of recording, classifying, summarizing, analyzing & interpreting the financial transactions & communicating the results thereof to the persons interested in such information.”
  • Process of accounting starts by first identifying the events & transactions which are of financial character & then be recorded in books of account.
  • Recording is done in journal or subsidiary books also known as primary books.
  • After recording, transactions & events are transferred to secondary books, i.e., ledger.
  • Accounting also interprets the recorded, classified & summarized transactions & events.
  • Stewardship accounting was the root of financial accounting system.
  • Double entry book keeping was developed in 15th century.
  • Management accounting developed in 20th century.
Procedural Aspects of Accounting Procedure of Accounting can be divided into two parts:

  • Generating financial Information

 

-                 Recording: it’s the basis of accounting which is basically done in journal.

-                 Classifying: It’s the systematic analysis of recorded data which is basically done in ledger.

-                 Summarizing: It’s the preparation & presentation of classified data in a manner useful to internal as well as external users of financial statements. It consists of trial balance, profit & loss account, balance sheet & cash flow statement.

-                 Analyzing: it’s the methodical classification of data given in financial statements.

-                 Interpreting: it’s the final function of accounting concerned with explaining the meaning & significance of the relationship as established by the analysis of accounting data.

-                 Communicating: It transmits summarized, analyzed & interpreted information to end users to enable them to make rational decision.

 

  • Using financial information
Objectives of accounting
  • Systematic recording of transactions (journal, ledger & trial balance).
  • Ascertainment of results of above recorded transactions (manufacturing, trading & profit & loss account).
  • Ascertainment of financial position of business (balance sheet).
  • Providing info to the users for rational decision making (financial reports).
  • To know the solvency position of business.
Functions of Accounting
  1. Measurement: Accounting measures past performance of the business entity & depicts its current financial position.
  2. Forecasting: Accounting helps in forecasting future performance & financial position of enterprise using past data.
  3. Decision Making: Accounting provides relevant info to the users of accounts to aid rational decision making.
  4. Comparison & Evaluation: Accounting assesses performance achieved in relation to targets & discloses info regarding accounting policies & contingent liabilities which play an important role in predicting, comparing & evaluating financial results.
  5. Control: Accounting also identifies weaknesses of the operational system & provides feedbacks regarding effectiveness of measures adopted to check such weaknesses.
  6. Government Regulation & Taxation: Accounting provides necessary info to the government to exercise control.
Book Keeping
  • It’s an activity concerned with the recording of financial data relating to business operations in a significant & orderly manner.
  • In India, term ‘financial statements’ means profit & loss account & balance sheet including notes & schedules forming part of accounts.
Objectives of book keeping
  • Complete recording of transactions
  • Ascertainment of financial effect of business.

 

Difference between Book keeping & Accounting
Book Keeping Accounting
  • The process concerned with recording of transaction.
The process concerned with summarizing of recorded transactions.
  • It constitutes as a base of accounting.
It’s considered as a language of business.
  • Financial statements do not form part of this process.
Financial statements are prepared in this process on the basis of book keeping records.
  • Managerial decisions cannot be taken with the help of these records.
Management takes decisions on the basis of these records.
  • There is no sub-field of book keeping.
It has several sub-fields like financial accounting, management accounting, etc.
  • Financial position of business cannot be ascertained through book keeping records.
Financial position of the business is ascertained on the basis of accounting reports.

 

 

Sub-Fields of Accounting
  1. Financial Accounting: It covers preparation & interpretation of financial statements & communication to the users of accounts. It’s historical in nature. It also helps in determining the net result for an accounting period & the financial position as on the given date.
  2.  Management Accounting: It is concerned with internal reporting to the managers of a business unit.
  3. Cost Accounting: “The process of accounting for cost which begins with recording of income & expenditure or basis on which they are calculated & ends with the preparation of periodical statements & reports for ascertaining & controlling costs.
  4. Social Responsibility Accounting: It’s concerned with accounting for social costs incurred by the enterprise & social benefits created.
  5. Human Resource Accounting: It’s an attempt to identify, quantify & report investments made in human resources of an organization that are not presently accounted for under conventional accounting practice.
Users of Accounting Info
  • Internal Management & owners
  • External Users or Outsiders

 

Following are the various users of Accounting info:

 

  • Investors:

-                 Provide risk capital.

-                 They need info to assess whether to buy, hold or sell their investment.

-                 They’re interested to know the ability of the business to survive, prosper & to pay dividend.

  • Employees:

-                 Their growth is directly proportional to growth of organization.

-                 They are interested to know the stability, continuity & growth of the enterprise & its ability to provide remuneration, retirement & other benefits & to enhance employment opportunities.

  • Lenders: They are interested to know whether their loan-principal & interest will be paid when due.
  • Suppliers & creditors: Accounting info helps them to decide-

-                 The ability of enterprise to pay their dues.

-                 Credit policies.

-                 Rates to be charged, etc.

-                 They are also interested in long term continuation of enterprise.

  • Customers: They are concerned with stability & profitability of the enterprise because their functioning is more or less dependent on supply of goods.
  • Government & their agencies: They regulate the functions of business enterprise for public good, allocate scarce resources among competing enterprises, control prices, charge excise duties & taxes so they have continued interest in the business enterprise.
  • Public: Enterprise may make a substantial contribution to the local economy in many ways including the number of people employed & their patronage to local suppliers.

Stay tuned for more CPTians…….

 

 

 

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