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Meaning and Scope of Accounting

Meaning and Scope of Accounting

According to AICPA, “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”.

From the above, we can conclude that accounting refers to:

  1. a procedure of writing financial transactions and events.
  2. a system of recording, classifying, summarizing, analyzing, interpreting & reporting periodically, in terms of money, which provides necessary financial information.

Accounting accumulates data systematically and supplies the necessary information to the users of financial statements with the help of which the users can take proper economic decisions and also may make proper predictions.

Accountancy is a broader and more flexible concept and requires more understanding than book keeping, which includes merely the process of recording of transactions; whereas accountancy includes further activities like classifying, summarizing, analyzing, interpreting & reporting. Accounting reports give more information than book keeping records.

Branches of Accounting

Accounting has basically three branches:

Financial Accounting:

  • It is concerned with the maintenance of Books of Accounts of an enterprise,
  • recording & classifying all its financial transactions & events with a view to prepare Annual Financial Accounts
  • which can be used by various stakeholders. (i.e. General  Purpose Financial Statement)

Management Accounting:

  • It refers to use of accounting data with Proper analysis in reporting, so as to serve the need of management.
  • To help them in decision making & exercising proper controls.

Cost Accounting:

  • Generally manufacturing concerns maintains cost accounts
  • with a view to ascertain the cost of goods manufactured or services rendered with proper break-up of cost &
  • also providing useful data to management for effective cost control.

Need and Use of Accounting:

  • In order to solve the day-to-day financial & operational problems, it becomes necessary to have knowledge about the past and present economic events.
  • Accounting is developed out of the need for communicating necessary information about the events.
  • Maintenance of accounts would become unnecessary if a decision maker could remember and observe all the relevant financial events personally.
  • This is not possible due to the following facts:
  • since it is not possible for a human being to remember all the events which occurred at different places & different times.
  • all attributes of an event are not equally useful and important to the users.
  • In a Medium & Large size organisation, decision maker will himself not handle all the financial transactions & events personally & hence there’s no question of remembering.

Basic care to be taken in maintenance of Accounts to make it useful:

  • The events are to be recorded in such a manner as they could easily be comprehended and,
  • at the same time, such records may also be used as evidences of the events in future.
  • In order to avoid ambiguity of the recorded evidences, a clear-cut explanation becomes necessary.

Limitation of accounting:

  • Accounting is not an exact science.
  • It is based on many assumptions & conventions.
  • It involves many estimation which results in to subjectiveness.
  • There are different alternatives possible for the same item which gives scope for manipulation to get desired result.
  • It cannot record the effect of many important events which cannot be measured in terms of money like value of human resources which an enterprise has.
  • It does not consider the effect of inflation on income, expense, assets & liabilities.

Functions of accounting data:

Accounting data serves the following functions:

  • Measurement: Account data helps to measure the performance & financial position of the enterprise. It measures Assets, liabilities, Expenses & Incomes.
  • Forecasting: On the basis of past accounting data, forecasting about future plans are made.
  • Decision Making: Various decisions requires timely & correct information which is provided by accounts.
  • Evaluations: Evaluation of an enterprise’s performance & financial health is done from accounting data.
  • Control: By adopting various accounting techniques, checks & balances the activity of the enterprise is controlled.

Meaning and Scope of Accounting

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