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- Unit-2 Nature and Scope of AccountingUnit-2
Unit-2 Nature and Scope of Accounting
This unit elaborates the need for accounting and then discusses the nature, scope and importance of accounting.
Define accounting and explain its scope.
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Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business. Accounting also refers to the process of summarizing, analyzing and reporting these transactions to oversight agencies, regulators and tax collection entities. The financial statements that summarize a large company's operations, financial position and cash flows over a particular period are a concise summary of hundreds of thousands of financial transactions it may have entered into over this period. Accounting involves a series of activities, as listed out in the scope of accounting. These activities are : (1) identifying, (2) measuring, (3) recording, (4) classifying, (5) summarizing, (6) analyzing, (7) interpreting, and (8) communicating, the financial transactions and events.
Scope of Accounting:
- Accounting is concerned with financial transactions and events which bring about a change in the resources (or wealth) position of the business firm. Such transactions have to be identified first, as and when they occur. It is not difficult because. there will be proof in the form of a bill or receipt (called vouchers). With the help of these bills and receipts identification of a transaction is easy. For example, when you purchase something you get a bill, when you make payment you get a receipt.
- These transactions are to be measured or expressed in terms of money, if not done already. Generally, this problem will not arise, because the statement of proof expresses the transaction in terms of money. For example, if ten books are purchased at the rate of Rs. 20 each, then the bill is prepared for Rs. 200. But, if an event cannot be expressed in monetary terms, it will not come under the scope of accounting.
- The transactions which are identified and measured are to be recorded in a book called journal or in one of its sub-divisions.
- The recorded transactions are to be classified with a view to group transactions of similar nature at one place. The work of classification 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 to one place. For example, all payments of salaries are brought to salaries account.
- The recording and classification of many transactions 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. The summarization is done in the form of profit and loss account which reveals the profit made or loss incurred, and the balance sheet which reveals the financial position.
- The summary results will have to be analyzed, interpreted (critically explained) and communicated to interested parties. Accounting information is generally communicated in the form of a 'report'. Big organizations generally present printed reports, called published accounts.