MDU BBA NOTES

SEMESTER-1

Financial Accounting

Meaning And Scope of Accounting

Meaning And Scope of Accounting

Meaning of Accounting

The American Institute of Certified Public Accountants (AICPA) has defined accounting as the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions, and events which are, in part at least, of financial character, and interpreting the results thereof. With more significant economic development resulting in changing role of accounting, In 1966, the American Accounting Association (AAA) defined accounting as ‘the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information’.

The Accounting Principles Board of AICPA also emphasized that the function of accounting is to provide quantitative information, primarily
financial in nature, about economic entities, intended to be useful in making economic decisions.

“Accounting is the art of recording, classifying, and summarising 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 result thereof.”

Branches of Accounting

The main Branches of Accounting is as follows:-

Financial Accounting

The purpose of this branch of accounting is to keep a record of all financial transactions so that:-

1. The profits earned or losses sustained by the business during an accounting period can be worked out,
2. The financial position of the business 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.

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.

Management Accounting

The purpose of management accounting is to assist the management in taking rational policy decisions and evaluating the impact of its decisions and actions.

Scope of Accounting

The main Scope of Accounting is as follows:-

Systematic Recording of Transactions

The basic objective of accounting is to systematically record the financial aspects of business transactions i.e. book-keeping. These recorded transactions are later on classified and summarized logically for the preparation of financial statements and for their analysis and
interpretation

Ascertainment of results of above-recorded transactions 

The accountant prepares a profit and loss account to know the results of business operations for a particular period of time. If revenue exceeds expenses then it is said that the business is running profitably but if expenses exceed revenue then it can be said that the business is running at loss. The profit and loss account helps the management and different stakeholders in taking rational decisions.

Ascertainment of the financial position of the business 

The businessman is not only interested in knowing the results of the business in terms of profits or loss for a particular period but is also anxious to know what he owes (liability) to outsiders and what he owns (assets) on a certain date. To know this, an accountant prepares a financial position statement popularly known as a Balance Sheet.

Providing information to the users for rational decision-making 

Accounting as a ‘language of business’ communicates the financial results of an enterprise to various stakeholders by means of
financial statements. Accounting aims to meet the information needs of the decision-makers and helps them in rational decision-making.

To know the solvency position

By preparing the balance sheet, management not only reveals what is owned and owed by the enterprise, but also it gives the information regarding concern’s ability to meet its liabilities in the short run (liquidity position) and also in the long run (solvency position) as and when they fall due.

FUNCTIONS OF ACCOUNTING

The main functions of accounting are as follows:-

1. Measurement: Accounting measures the past performance of the business entity and depicts its current financial position.
2. Forecasting: Accounting helps in forecasting future performance and financial position of the enterprise using past data and analyzing trends.
3. Decision-making: Accounting provides relevant information to the users of accounts to aid rational decision-making.
4. Comparison & Evaluation: Accounting assesses performance achieved in relation to targets and discloses information regarding accounting policies and contingent liabilities which play an important role in predicting, comparing, and evaluating the financial results.
5. Control: Accounting also identifies weaknesses in the operational system and provides feedback regarding the effectiveness of measures adopted to check such weaknesses.
6. Government Regulation and Taxation: Accounting provides the necessary information to the government to exercise control of the entity as well as in the collection of tax revenues.

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