4. Role of Accounting

ROLE OF ACCOUNTING

For centuries, the role of accounting has been changing with the changes in economic development and increasing societal demands.

1.  It describes and analyses a mass of data of an enterprise through measurement, classification and summarization, and reduces those date into reports and statements, which show the financial condition and results of operations of that enterprise. Hence, it is regarded as a language of business.
2. It also performs the service activity by providing quantitative financial information that helps the users in various ways.
3. Accounting as an information system collects and communicates economic information about an enterprise to a wide variety of interested parties. However, accounting information relates to the past transactions and is quantitative and financial in nature, it does not provide qualitative and non-financial information. These limitations of accounting must be kept in view while making use of the accounting information.

 

MEANING AND DEFINITION OF BOOKKEEPING

• Definition: “The art keeping permanent record of business transactions is book keeping.”
• J. R. Batliboi: “book-keeping is an art of recording business dealings in a set of books”.
• R. N. Carter: “Book-keeping is the science and art of correctly recording in the books

          of accounts, all those business transactions that results in transfer of money’s worth”.

FEATURES OF BOOK-KEEPING

• It is the process of recording business transactions.
• Monetary transactions are only recorded.
• Recording is made in given set of books of accounts.
• Record is prepared for a specific period but presented for future references.
• It is an art of recording business transactions scientifically.

DIFFERENCE B/W BOOK-KEEPING AND ACCOUNTING

BOOK-KEEPING

• The object of book-keeping is to prepare original books of accounts, trial balance and to maintain systematic record of financial results.

 *  It has a limited scope .

• Level of work is restricted to clerical work

ACCOUNTING

• The object of accounting is to record, classify, summarize, analyze, and interpret the business transactions and ascertain financial results and to communicate to various parties.
• It has a wider scope.
• It is concerned with all levels of Management.

ADVANTAGES OF ACCOUNTING

• Replacement of memory
• Evidence court
• Assessment of taxation liability
• Comparative study
• Sale of business
• Assistance to the insolvent person
• Assistance to various parties
• Facilities in raising loans
• Information regarding financial position.

LIMITATIONS OF ACCOUNTING

• Records only monetary transactions.
• Unsuitable for forecasting.
• No realistic information
• Personal bias of the accountant affects the accounting statements .
• Incomplete information.
• Profit no real test of managerial performance .
• Historical in nature.
• Window dressing in balance sheet.

Roles of Accounting

The keywords here are identifying measuring recording and communicating. Let us study this in a little bit of detail

1. Identifying relevant transactions

Depending on the size of the business and hundreds of transactions can take place in a single day. Not everything can be recorded in the books of account. For all these transactions the accountant has to identify those transactions which are related to the business which are monetary in nature and which will come in our books of accounts

Example: Suppose Harsh Buys a refrigerator for a home for Rs.50,000. Which is a Business Transaction.

2. Measurement

Let us take a scenario where are trader trading in stationery items is selling the items within India and is also exporting some of his items to a dealer in China. What will be the common unit what will be the measuring unit will it be rupees will it be Paisa over let be a dollar a single unit common for all transactions has to be taken into account which is not to be changed every year.

3. Recording

This is the basic (First) function of accounting for all business transactions all monetary (related to money) business transactions such as

Eg. sales purchases salaries and electricity are recorded or accounted in the books of account.

The recording is done in a book called journal which will study more in the coming chapters.

After the Accountant has recorded data the data has to be classified in a systematic manner,

similar accounts are grouped and placed in one place called a book called ledger this is the second step of recording

from journal we record the transactions all the transactions falling under the same head in an account called ledger which will study ahead in the coming chapters.

4. Communication

After the accounts has been recorded and measured analyzed the job of an accountant does it complete at this point. 

Communication is concerned with transmitting the information to the end-users of financial statements so they can prepare to make decisions on the basis of books of accounts.

Why do the accountants need to communicate the results of the books of account or communicate the results of the books of accounts to the uses of financial statements who are these uses of financial statements let us understand?

There can be two kinds of uses of two financial statements. External users and internal users. People who are on the payroll (on salary) of the company are called internal uses to financial statements.

Internal users

If the company is growing, the employee’s growth is certain. The CEO the CFO vice president managers plant manager's there all internal to the organization and hence internal uses of the organization

External users

A business cannot function alone there are banks who give loans to the businesses there are creditors who give the gift credit to the businesses there is the government who keeps an eye if they are papering a taxes correctly or not the customer buys are products because he trusts us all these people are external to the organization they are dealing with the organization from the outside and external uses of financial information

Users                                                                                      Why do they need information?

Investors                                                                                 return on money invested in the business

Unions and employee groups                                                 Stability in Income, Bonus (Out of   profits)

Lenders and Banks                                                                 Credibility of the company

Creditor’s                                                                                Continuous supply of products

Government and related Organisations                                  Complaisance and payments of dues

Social Groups                                                                          Impact on the environment

Other fields of accounting                                                                 

Financial accounting refers to the preparation and interpretation of financial information and communication to the users of accounts. This is what we have understood above accounting is the basic sense

Management accounting refers to internal reporting to the management of the business. Management accountant is a very important component that helps the management make important decisions regarding the business operations

Cost accounting

Cost accountants are usually hired by companies that are dealing with manufacturing products. For any manufacturer cost of the product manufactured by him is the most important factor which decides his profits

All this tells you about the person or the data but not that they mention any quantity or numbers

Accounting has certain qualitative characteristics let us understand what qualitative characteristics are.

Accounting data should be recorded in such a way that it is very easy and understandable and useful to the person who uses that data. 

For example, if I just randomly right 10 numbers it will not make any sense

But let’s say that these 10 numbers are the marks of the students in your class then it would make sense

ROLE OF ACCOUNTING

For centuries, the role of accounting has been changing with the changes in economic development and increasing societal demands.

It describes and analyses a mass of data of an enterprise through measurement, classification and summarization, and reduces those date into reports and statements, which show the financial condition and results of operations of that enterprise. Hence, it is regarded as a language of business.

It also performs the service activity by providing quantitative financial information that helps the users in various ways.

Accounting as an information system collects and communicates economic information about an enterprise to a wide variety of interested parties. However, accounting information relates to the past transactions and is quantitative and financial in nature, it does not provide qualitative and non-financial information. These limitations of accounting must be kept in view while making use of the accounting information.

USERS OF ACCOUNTING INFORMATION

Owners:

The owners provide funds or capital for the organization. They possess curiosity in knowing whether the business is being conducted on sound lines or not, and whether the capital is being employed properly or not. Owners, being businessmen, always keep an eye on the returns from the investment. Comparing the accounts of various years helps in getting good pieces of information.

Management:

The management of the business is greatly interested in knowing the position of the firm. The accounts are the basis, the management can study the merits and demerits of the business activity. Thus, the management is interested in financial accounting to find whether the business carried on is profitable or not. The financial accounting is the “eyes and ears of management and facilitates in drawing future course of action, further expansion etc.”

Creditors:

Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that these groups are interested to know the financial soundness before granting credit. The progress and prosperity of the firm, two which credits are extended, are largely watched by creditors from the point of view of security and further credit. Profit and Loss Account and Balance Sheet are nerve centers to know the soundness of the firm.

Employees:

Payment of bonus depends upon the size of profit earned by the firm. The more important point is that the workers expect regular income for the bread. The demand for wage rise, bonus, better working conditions etc. depend upon the profitability of the firm and in turn depends upon financial position. For these reasons, this group is interested in accounting.

Investors:

The prospective investors, who want to invest their money in a firm, of course wish to see the progress and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This is to safeguard the investment. For this, this group is eager to go through the accounting which enables them to know the safety of investment.

Government:

Government keeps a close watch on the firms which yield good amount of profits. The state and central Governments are interested in the financial statements to know the earnings for the purpose of taxation. To compile national accounting is essential.

Consumers:

These groups are interested in getting the goods at reduced price. Therefore, they wish to know the establishment of a proper accounting control, which in turn will reduce to cost of production, in turn less price to be paid by the consumers.

Researchers are also interested in accounting for interpretation.

Research Scholars:

Accounting information, being a mirror of the financial performance of a business organization, is of immense value to the research scholar who wants to make a study into the financial operations of a particular firm as such study needs detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long-term liabilities and share-holders funds.

• The accounting system concerned only with the financial state of affairs and financial results of operations.
• It is the original form of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions.

MEANING AND DEFINITION OF BOOKKEEPING

Definition: “The art keeping permanent record of business transactions is book keeping.”
J. R. Batliboi: “book-keeping is an art of recording business dealings in a set of books”.
R. N. Carter: “Book-keeping is the science and art of correctly recording in the books of accounts, all those business transactions that results in transfer of money’s worth”.

FEATURES OF BOOK-KEEPING

• It is the process of recording business transactions.
• Monetary transactions are only recorded.
• Recording is made in given set of books of accounts.
• Record is prepared for a specific period but presented for future references.
• It is an art of recording business transactions scientifically.

DIFFERENCE B/W BOOK-KEEPING AND ACCOUNTING

BOOK-KEEPING

• The object of book-keeping is to prepare originalbooks of accounts, trial balance and to maintain systematic record of financial results.
• It has a limited scope.
• Level of work is restricted to clerical work