Accounting

What is accounting and its objectives?

Accounting means system of classifying, summarizing and recording of financial and business transactions. Further, it is communication of financial and non-financial information.

What is Accounting?

According to American Institute of Certified Public Accountants-

“Accounting is an art of recording, classifying, and summarising in a significant manner and in terms of money , transactions and events which are, in part at least, of a financial character, and interpreting result thereof”.

In brief, accounting is an art of record keeping. The process of accounting begins with by first identifying the events and transactions which are of financial nature. And then recorded in books of accounts. This recording is done in journal and subsidiary books also known as Primary Books.

Further accounting is a key function of any business. It is regarded as a process of monitoring business finances by recording its transactions like account payable, receivable and other monetary transactions.

The primary function of accounting is to provide quantitative information , primarily of financial nature.

Thus, accounting may be defined as the process of recording, classifying, summarising, analysing and interpreting the financial transactions. And communicating the result thereof to the persons interested in such information.

What are the procedural aspects of accounting?

Procedural aspects is divided into two parts i.e.

i) Generating Financial Information and

ii) Using the financial Information

lets elaborate these procedural aspects.

i) Generating Financial Information

Generating Financial Information involves following steps are as follows:

1.) Recording:

recording is the basic function of accounting. All business transactions of a financial nature are recorded in books of accounts. For instance sales, purchases and salary payments etc. And these transactions is evidenced by documents such as sales bill, purchase bill or salary slip etc.

Further, recording is done in a book is called “Journal”.

2.) Classifying:

Classification is concerned with systematic analysis of of recorded data with view to group transactions or entries of one nature so as to put information in concise & usable form. Therefore , the book containing the classified information is called “Ledger”.

3.) Summarising:

It means preparation and presentation of the classified data in useful manner. This process leads to preparation of financial statements.

4) Analyzing:

The term analysis means systematic classification of data given in the financial statements. In brief, the figure given in financial statements will not help anyone unless they are in simple form.

For instance all fixed assets put in fixed assets head whereas all current assets puts in current assets head. It is concerned with the establishment of relationship between the items of profit & loss and balance sheet.

5.) Interpreting:

This is the final function of accounting. It is concerned with the explaining the meaning and significance of the relationship as established by the analysis of accouting data.

Further, the recorded financial data is analysed and interpreted in a manner that will help the end user to make to Judgements and economic decisions.

6.) Communicating:

It means transmission of summarized , analyzed and interpreted information to end user to help them to make rational decisions.

ii) Using the financial Information

There are certain users of accounts . Besides the owner and managers of an enterprise user includes investor,employees,lenders, customers,government and other agencies etc. Accounting provides the art of presenting data systematically to user of accounts.

The information is useless or meaningless unless it is relevant and material to end user’s decision.The information should be unbiased. Further, the user should understand not only the financial results depicted by the accounting figures , but also should be able to assess its reliabilty and compare it with information about alternative opportunities.

Owner and management of an enterprise is known as internal user . The management uses accounting information in an analytical manner to take valuable decisions for the business.

What are the objectives of accounting?

Following are the main objectives of accounting.

a) Systematic recording of transactions :

Basic objective of accounting is to systematically record the financial aspects of business transactions i.e. book-keeping.

b) Ascertainment of results of above recorded transactions :

Accountant prepares profit and loss account to know the results of the business in terms of profit or loss for a particular period . The profit or loss helps management and stakeholders in taking rational decisions.

c) Ascertainment of financial position of business:

Businessman is not only interested in knowing the results of the business in terms of profit or loss but also anxious to know what he owes to outsider and what he owns. To know this Balance sheet is prepared. The balance sheet is a statement of assets and liabilities. And helps in finding out the financial help of business.

d). Providing information to user for rational decision making:

Accounting aims to meet the information needs of the decision maker and helps them in rational decision making.

e) To know the solvency Position:

By preparing the balance sheet, management not only discloses what is owed and owned by an enterprise, but also gives information about enterprise ability to meet its liability in short run (ie liquidity position) and solvency position.