Home / Bookkeeping | Accounting | Double Entry System

1476 Views

Estimated reading time : 26 Minutes

Accounting | Meaning | Functions | Objectives | Scope | Process | Branches | Bookkeeping vs Accounting

Arjun EP

Published on: June 13, 2020

Accounting | Meaning of Accounting

Accounting is the process or work to keep recording financial transactions.

It is broader than bookkeeping.

It starts when bookkeeping ends.

Accounting is the language of business.

It is an analysis and interpretation of book keeping records.

It is an art of measuring, recording and communicating of financial information.

It includes maintenance of accounting records as well as preparation of financial and economic information.

Accounting is an information system.

It measures, processes and communicates financial information for decision makers.

Business activities are identified and measured in terms of money.

Then processed and finally communicated to the various groups of users.

Without accounting, the financial transactions are only data.

They are converted to information by the accounting processing system.

In simple meaning, accounting is a story of value or money.

From where the money come, how much the money worth, how much the money cost, how much value for money exchange and how much of money is in hand at any given time.

Accounting is that body of knowledge which is concerned with measurement and communication of financial information about economic activities to interested persons and parties.

Accounting provides information to interested parties with quantitative financial information.

It helps to them to make decisions about the use of resources in business or other entities.

Interested or related parties take decision from financial information.

Definitions of accounting

According to Oxford Dictionary, “Accounting is the process or work of keeping financial accounts.”

According to R N Anthony, “Accounting system is the means of collecting, summarizing, analyzing and reporting in monetary terms of the business.”

Keep in Mind (KIM)

Accounting science or art?

In simple words, science is world based the fact that can be proved with examples and by experience.

Art is ability or skill that can be developed with training and practice.

In accounting, we apply both science and art. Therefore, accounting is science as well as art.

Functions of Accounting

There are many functions of accounting; the major functions of accounting are as under:

Recording

Recording is the basic function of accounting.

It is principally based on all financial transactions of business.

They are recorded in chronological order.

These financial transactions are initially recorded in the journal.

Classification

After recording financial transactions in journal entries, they are classified into different related group according to their nature.

The work of classification is done in the book of ledger account.

Summarising

Classified data (ledger account) are summarised into trial balance.

Arithmetic accuracy is checked from trial balance.

From trial balance, different financial statements are prepared at the end of an accounting period.

They are trading account, profit and loss account and balance sheet.

Analysis and interpretation

The recorded financial data is analyzed.

It is interpreted in a manner that the end-users can make a meaningful judgment about the financial condition.

The data is also used for preparing the future plans and framing of policies for executing such plans in actions.

Communication

Different analysed and interpreted accounting information are to be communicated to the different interested parties.

They are shareholders, creditors, investors and trade union etc.

These are equally useful to management itself.

They use this information for various purposes according to their need.

This is done through preparation of accounting ratios, graphs, diagrams, funds flow statements etc.

Click on the photo for FREE eBooks

Objectives of Accounting | Importance of Accounting

The primary objectives or importance of accounting are as under:

Keep transactions

The main objectives of accounting are to keep financial transactions in systematics way.

Whenever, accounting data are needed is future, It will help to find out easily.

Find out profit or loss

Other objectives of accounting are to find out profit or loss of the organization.

It helps to find out profit or loss of the organization in an accounting year by preparing income statement (profit and loss account).

Find out financial position

It helps to find out financial position of the organization in an accounting year by preparing balance sheet.

Balance sheet can be prepared for single year as well as comparative years.

Provide information

It provides necessary information and up to date to related users.

Users are management, creditors, employees and government etc.

They take decision according to their need by comparing financial statement.

Fixation the tax

Every state and country charges tax on income.

Income may be either personal or firm.

Accounting helps to fixation of tax to pay the government in an accounting year.

Keep in Mind (KIM)

The importance of accounting can be understood by answering following questions:

How much was earned last year?

How much we have earned this year?

Is our business improving?

How much cash do we have?

How much loan we have taken?

How much investment we have done?

Scope of Accounting

By scope we mean all those areas for sectors where accounting is being used in various purposes are regarded as scope of accounting.

Following are the major scope of accounting:

Business

Accounting is widely applicable in the business sector.

In the modern world, many peoples are engaged in business sector.

They keep accounting of their business.

They follow Generally Accepted Accounting Principle (GAAP) to keep accounting. Properly recorded accounting helps to find out profit, loss and financial position of business firm.

Government organizations

Government organizations do not follow Generally Accepted Accounting Principle (GAAP).

The government authority use government accounting to keep systematic records of all transactions in order to find the position of public fund.

Non-government organizations

Non-government and service organizations such as NGOS, INGOs, Red Cross Society, SOS etc plays a vital role in the development of nation.

They also use accounting.

The accounting system used in these organizations is called fund accounting (non-trading accounting).

Individuals

Individuals also involve in different economic activities to earn their livelihood. They also use accounting system. The use receipts and payments account and statement of affairs etc according to their need.

Keep in Mind (KIM)

Concern, enterprises, trading house, traders, store, center, firm, company, M/s etc are business firm.

Accounting Process | Accounting Cycle

A complete sequence of accounting procedures is an accounting process.

It is also popularly known by accounting cycle.

It includes recording, classifying, summarizing and interpreting.

An accounting cycle begins with the recording of transactions and ending with the preparation and interpretation of the final account.

Accounting process is of cyclic and sequential order.

Step 1 Identify financial transactions

Step 2 Journal entries for transactions

Step 3 Post journals to ledgers

Step 4 Prepare an unadjusted trial balance

Step 5 Record the adjusting journal entries

Step 6 Prepare adjusted trial balance

Step 7 Prepare worksheet

Step 8 Prepare financial statements

Step 9 Closing entries

Step 10 Reversing entries

Accounting Process | Accounting Cycle

Branches of Accounting

In old time when business was in limited areas or production was small, there was only one accounting.

But at present time, it has more branches.

This is due to its interested parties like owners, management, creditors, tax authority etc.

Some important accounting branches are as follows:

Cost accounting

Manufacturing company uses cost accounting.

The main object of cost accounting is to find-out the cost of goods produced or service rendered by a business.

Cost accounting is the only one method to calculate cost of the goods or services at every stage of production.

It also helps to control avoidable losses and wastages.

Financial accounting

Financial accounting is main accounting of debit and credit.

It records actual monetary transactions in journal entries; then other accounts are prepared.

The main object of financial accounting is to find-out profit or loss of business organization at certain accounting period.

It also shows the financial position (balance sheet) at the end of accounting period.

Management accounting

Management accounting is the main sources of accounting information.

The main object of management accounting is to supply related information to management to take decision.

After comparing many alternatives, management takes decision and control unnecessary expenses.

Auditing

Auditing is an act of examination fairness of presentation of financial statements.

Auditor audits cost accounting and financial accounting.

It also focuses on company’s internal control structure by adequate evaluation.

There are two types of auditing i.e. internal and external.

Tax accounting

Tax accounting is related to tax planning and preparation of tax returns.

It also involves determination of income tax, VAT, GST and other taxes as as well as tax advisory services.

Differences between Bookkeeping and Accounting

Both bookkeeping and accounting used to record financial transaction of the business.

Although they seem similar yet there are some different between them.

They are given below:

Bases	Bookkeeping	Accounting
Involvement	Book-keeping involves only recording parts of accounting.	Accounting involves entire accounting process.
Purpose	The main purpose of bookkeeping is to record financial transactions permanently.	The main purpose of accounting is to find out profit or loss; and financial position of the organization.
Whole or part	It is partial accounting.	It is whole accounting.
Skill	Bookkeeper is known clerk; he is less qualified than accountant.	Accounting keeper is known accountant; he is more qualified than clerk.
Decision	From bookkeeping, management cannot take decision.	From accounting, management can take decision.