Meaning of Accounting

Traditional definition:

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. ( American Institute of Certified Public Accountants 1941 )

Meaning of Accounting
Modern definition:

The process of identifying, measuring and communicating economic information to permit informed judgments' and decisions by the users of accounting information ( American Accounting Association 1966)

Activities covered under Accounting

Identifying Measuring Recording

Analyzing

Summarizing

Classifying

Interpreting

Communication

Meaning of Accountancy
Accountancy refers to a systematic knowledge of

accounting. It explains why to do and how to do of various aspects of accounting. It tells us why and how to prepare the books of accounts and how to summarize the accounting information and communicate it to the interested parties.

Meaning of Book-keeping
Book-keeping is a part of accounting and is concerned

with record keeping or maintenance of books of accounting which is often routine and clerical in nature. It covers 4 activities: 1. Identifying the transactions and events. 2. Measuring the transactions and events in a common measuring unit. 3. Record the identified and measured transactions and events in proper books of accounts. 4. Classifying the recorded transactions and events in ledger.

Difference between Book-Keeping and Accounting

Basis of distinction 1. Scope Book-keeping Book-keeping involves identifying, measuring, recording and classifying. Book-keeping is primary stage. To maintain systematic records. Accounting Accounting in addition also involve summarizing, analyzing, interpreting and communicating. Accounting is the secondary stage. It starts where book-keeping ends. To ascertain net results of operations and financial position and to communicate. It is done by senior staff.

2. Stage

3. Basic objective

4. Who performs

It is performed by junior staff.

Difference between Book-Keeping and Accounting

Basis of distinction 5. Knowledge level Book-keeping The book-keeper is not required to have higher level of knowledge that of an accountant. The book-keeper may or may not possess analytical skill. Accounting The accountant is required to have higher level of knowledge than that of book-keeper. An accountant is required to possess analytical skill.

6. Analytical skill

7. Nature of job

The job of a book-keeper is The job of an accountant is often routine and clerical in analytical in nature. nature. It does not cover designing of accounting system. It covers designing of accounting system

8. Designing of accounting system

Difference between Book-Keeping and Accounting

Basis of distinction 9. Supervision and checking Book-keeping The book-keeper does not supervise and check the work of an accountant. Accounting An accountant supervises and checks the work of a book-keeper.

Users of an accounting information and their needs

Users 1. Short term creditors Need of information Short term creditors need information to amount owing to them will be paid when due and whether they should extend, maintain or restrict the flow of credit to an individual enterprise.

2. Long term creditors

They need information to determine whether their principals and the interests thereof will be paid when due and whether they should extend, maintain or restrict the flow of credit to an enterprise. Present investors need information to judge prospects for their investment and to determine whether they should buy, hold or sell shares.

3. Present investors

Users of an accounting information and their needs

Users 4. Potential investors Need of information Potential investors need information to judge prospects of an enterprise and to determine whether they should buy the shares.

5. Management

They need information to review the firms: Short term solvency Long term solvency. Effective utilization of resources. Profitability in relation to turnover. Profitability in relation to investment
They are interested in information about the stability and profitability of the employers. They are also interested in information which enables them to assess the ability of the enterprise to pay remuneration, retirement benefits and to provide employment opportunities.

6. Employees

Users of an accounting information and their needs

Users Need of information 7. Tax authorities Tax authorities need information to assess the tax liabilities of an enterprise. 8. Customers They have an interest in information about the continuation of an enterprise, especially when they have established a long-term involvement with, or are dependent on the enterprise. They are interested in the allocation of resources and therefore the activities of enterprise. They also require information in order to regulate the activities of enterprise, determine taxation policies and as the basis for the national income and similar statistics.

9. Government and their agencies

Users of an accounting information and their needs

Users
10.Public

Need of information
Financial statements may assist the public by providing information about trends and recent development in the prosperity of the enterprise and the range of its activities.

Primary objectives of accounting

Objectives

To maintain systematic accounting records

To ascertain the financial performance

To ascertain the financial position

To communicate the information to the users

Functions of accounting
Measurement
Forecasting Decision making Comparison and evaluation Control Government regulation and taxation

Advantages of accounting
Facilities to replace memory. Facilitates to comply with legal requirement.

Facilitates to ascertain net result of operations.

Facilitates to ascertain financial position. Facilitates the users to take decisions.

Facilitates a comparative study.

Assists the management. Facilitates control over assets.

Facilitates the settlement of tax liability.

Facilitates the ascertainment of value of business. Facilitates raising loans.

Acts as a legal evidence.

Disadvantages of accounting
Ignores the qualitative elements. Not free from bias. Estimated position and not real position. Ignores the price-level changes in case of financial

statements prepared on historical costs. Danger of window dressing

Basic accounting terms

Entity: an entity means an economic unit that performs

economic activities. Event: an event is a happening of consequences to an entity. (ex. Use of raw material in production) Business transaction: it is an exchange in which each participant receives or sacrifice value. It involves exchange of goods or services on cash or credit basis. It is an economic event that involves transfer of money or moneys worth. It occurs between an outsider and an accounting entity. Entry: it is the record made in the books of accounts in respect of a transaction or event. An entry is based on the basis of vouchers.

Basic accounting terms

Voucher: it is a document which serves as an evidence of

a transaction. The vouchers act as source documents on the basis of which transactions are recorded in the books of accounts. Assets: assets refer to tangible objects or intangible rights of an enterprise which carry probable future benefits. There are 4 types of assets: 1. Current assets. 2. Fixed assets. 3. Tangible assets. 4. Intangible assets.

Basic accounting terms

Liabilities: it refers to the financial obligations of an

enterprise other than owners funds. There are 2 types of liabilities: 1. Current liabilities. 2. Long-term liabilities. Assignment: Define purchases, sales, stock, debtors, creditors, receivables, payables, expenses, incomes, gains and losses and revenue

Basis of accounting

Accrual basis of accounting: it is a method of recording transactions by which revenue, costs, assets and liabilities are reflected in the accounts for the period in which they accrue. Cash basis of accounting: it is a method of recording transactions by which revenues, costs, assets and liabilities are reflected in the accounts for the period in which accrual receipts or actual payments are made.

With economics With statistics With mathematics With law With management

Relationship of accounting with other disciplines

Thank You..