Unit-1 Basic Concepts Of Accounting

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

Write notes on:

a) Advantage of Accounting, b) Branches of Accounting, c) Accounting Process, d) Types of Accounts.

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Learning Pundits Content Team

Written on Apr 16, 2019 12:12:33 PM

a) Advantage of Accounting

  1. Replaces memory: Since all the financial events are recorded in the books, there is no need to rely on memory. The books of account will serve as historical records. Any information required at any time call be easily had from these records.
  2. Provides control over assets: Accounting provides information regarding cash in hand. cash at bank, the stock of goods, the amounts receivable from various parties and the amounts invested in various other assets. Information about such matters help the owners and the management to make use of the assets in the best possible way.
  3. Facilitates the preparation of financial statements: With the help of information contained in the accounting records the Profit and Loss account and the Balance Sheet can be easily prepared. These financial statements enable the businessman to know the net result of business operations during the accounting period and the financial position of the business as at the end of the accounting period.
  4. Meets the information requirements: Various interested parties such as owners, lenders, creditors, etc., get the necessary information at frequent intervals which help them in their decision making.
  5. Facilitates a comparative study: With the help of accounting information one can compare the present performance of the enterprise with that of its past and with that of similar organizations. This enables the management to draw useful conclusions about the business and make efforts to improve the performance.
  6. Assists the management in many other ways: The accounting information provided to the management helps them in taking rational decisions and in planning and controlling all business activities.
  7. Difficult to conceal fraud or theft: It is difficult to conceal fraud, theft, etc. because of the periodic balancing of books of account. Further, in big organizations the book- , keeping work is divided among many persons which minimizes the chances for committing fraud.
  8. Tax matters: The Government levies various taxes such as customs duty, excise duty, sales tax, and income tax. Properly maintained accounting records will help in the settlement of all tax matters with the tax authorities.
  9. Ascertaining value of business: In the event of sale of a business firm, the accounting records will help in ascertaining the correct value of business.
  10. Acts as reliable evidence: Systematic record of business transactions is generally treated by courts as good evidence in case of disputes.

b) Branches of Accounting

  • Accounting as we know it today has evolved over many centuries in response to the changing economic, social and political conditions. The economic development and technological improvements have resulted in an increase in the scale of operations and the advent of the company form of business organization. This has made the management function more and more complex and increased the importance of accounting information. This gave rise to special branches of accounting. These are briefly explained below.
  1. Financial accounting: The purpose of this branch of accounting is to keep a record of all financial transactions so that 1. The profit earned or loss incurred by the business during an accounting period can be worked out, 2. The financial position of the business.as at the end of the accounting period can be ascertained, and 3. The financial information required by the management and other interested parties can be provided. Financial Accounting is mainly confined to the preparation of financial statements and their communication to the interested parties.
  2. Cost Accounting: The purpose of cost accounting is to analyze the expenditure so as to ascertain the cost of various products manufactured by the firm and fix the prices. It also helps in controlling the costs and providing necessary costing information to management for decision making.
  3. Management Accounting: The purpose of management accounting is to assist the management in taking rational policy decisions and to evaluate the impact of its decisions and actions. Examples of such decisions are pricing decisions, make or buy decisions, capital expenditure decisions etc. This branch of accounting is primarily concerned with providing the necessary accounting information about funds, costs, profits, etc., to the management which may help them in such decisions and also in planning and controlling business operations.

c) Accounting Process

  • The accounting system has following two stages : 1. The making of routine records, in prescribed form and according to set rules, of all events which affect the financial state of the organization; and 2. The summarization from time to time of the information contained in the records, its presentation in a significant form to interested parties, and its interpretation as an aid to decision making by these parties.
  • Stage 1 is called Book-keeping and stage 2 is called Accounting.
  • Book-keeping is thus a narrow term concerned mainly with the maintenance of the books of account and covers the first four activities listed in the scope of accounting viz., identifying the transactions and events to be recorded, measuring them in terms of money, recording them in the books of prime entry, and posting them into ledger.
  • Accounting, on the other hand, is concerned with summarizing the recorded data, interpreting the financial results and communicating them to all interested parties. In other words, accounting starts where bookkeeping ends. But in practice, the accountants also direct and review the work of bookkeepers and therefore the term accounting is generally used in a broader sense covering all the accounting activities, Thus, Book-keeping is regarded as a part of Accounting.
  • The term 'Accountancy' refers to a systematized knowledge of accounting and is regarded as an academic subject like economics, statistics, chemistry, etc. It explains 'why to do' and 'how to do' of various aspects of accounting. In other words, while Accounting refers to the actual process of preparing and presenting the accounts, Accountancy tells us why and how to prepare the books of account and how to summarize the accounting information and communicate it to the interested parties. Thus, Accountancy is a science (a body of systematized knowledge) whereas Accounting is the art of putting such knowledge into practice.
  • In general usage, however, Accountancy and Accounting are used as synonyms (meaning the same thing). But, of late, the term accounting is becoming more and more popular.