Unit-1 Basic Concepts Of Accounting

In this unit we intend to have an overview of Accounting and discuss its nature, scope and importance.

Define Accounting and explain its Scope?

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Learning Pundits Content Team

Written on Apr 16, 2019 11:28:42 AM

Definition of Accounting

  • According to the American Accounting Association "Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information". This definition stresses three aspects viz., identifying, measuring, and communicating economic information.
  • In the words of the Committee on Terminology, appointed by the American Institute of Certified Public Accountants, "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 results thereof.” This is a popular definition of accounting and it outlines fully the nature and scope of accounting activity.
  • You know a business is generally started with the proprietor's funds known as capital. The proprietor may also borrow some funds from hanks end other agencies. These funds are utilized to acquire the assets needed for the business and also to carry out various business activities. In the process a number of transactions take place. The accountant has to identify the transactions to be recorded, measure them in terms of money, and record them in appropriate books of account. Then he has to classify them under separate heads of account, prepare a summary in the form of Profit and Loss Account and Balance Sheet, and analyze, interpret and communicate the results to the interested parties. This is the sum and substance of accounting.

Scope of Accounting

  1. Accounting is concerned with the transactions and events which are of a financial character. Such transactions have to be identified by the accountant. He can do so with the help of various bills and receipts.
  2. Having identified the transactions, they should be measured or expressed in terms of money, if not expressed already. Every transaction is recorded in books only in terms of money and not in terms of physical quantities.
  3. The transactions which are identified and measured are to be recorded in a book called - 'Journal' or in one of its sub-divisions.
  4. The recorded transactions have to be classified with a view to group transactions of similar nature at one place. This work is done in a separate book called 'Ledger'. In the ledger, a separate account is opened for each item so that all transactions relating to it can be brought at one place. For example, salaries paid at different times are brought under 'Salaries Account'.
  5. The transactions which are recorded and classified will result in a mass of financial data. It is, therefore, necessary to summarize such data periodically (at least once a year) in a significant and meaningful form. This is done in the form of a Profit and Loss Account which reveals profit or loss, and a Balance Sheet which indicates the financial position of the business.
  6. The summarized results have to be analyzed and interpreted with the help of statistical tools like ratios, averages, etc., and examined critically. Later on, this data will be communicated in the form of reports to the interested parties.