Meaning and Scope of Accounting – CA Foundation Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.
Meaning and Scope of Accounting – CA Foundation Accounts Study Material
What do you mean by Accounting? Give its definition.
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, it is clear that accounting refers to:
- A procedure of writing financial transactions and events.
- A system of recording, classifying, summarizing, analyzing, interpreting and reporting periodically, in terms of money/which provides necessary financial formation.
The said financial information is used for taking necessary and proper decisions about the allocation of economic resources and running the organisation successfully.
Accounting accumulates data systematically and supplies the necessary information to the users of financial statements by which the users can take proper economic decisions and also may make proper predictions, i.e., in short, it conveys financial information about an entity for a specified period.
What are the branches of Accounting? Explain.
Accounting has basically three branches:
(a) Financial Accounting:
- It is concerned with the maintenance of books of account of an enterprise.
- Recording & classifying all its financial transactions and events with a view to prepare Annual Financial Accounts.
- To be used by various interest groups (i e. General Purpose Financial Statement).
(b) 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 and exercising proper controls.
- It may not have separate books of account but uses the data from financial accounts & cost accounts and
Properly analyses it, compares it, calculate ratios etc. and present it to management periodically.
(c) 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 and
- Govt, also has prescribed maintenance of cost records by specific industries.
(d) Social Responsibility Accounting:
- Concerned with measurement and reporting of the impact of the operations of an organisation on the society.
- Attempts to disclose the costs incurred and
- Benefits accrued to the society as a consequence of the activities of the organization.
(e) Human Resource Accounting:
- It is the process of measuring the amount of investments done in the human resource of an enterprise.
- It also reports the information regarding the activities related to human resource performed by the organisation and
- The end results of the human resource related activities to the stakeholders.
Who are the users of Financial Statement and what are their information needs?
The users of financial statement & their information needs:
|Users||Their information needs|
|1. Investors (providers of risk capital and their advisors)||Information to determine whether they should buy, hold or sell, the shares of the company. The owners of proprietary/partnership concerns wants to assess performance & financial health, to decide the continuance of such unit.|
|2. Employees (Employees and their representative groups i.e. unions)||Information that enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.|
|3. Lenders||To assess their Bonus & other claims.|
|4. Suppliers and other trade creditors||Information that enables them to determine whether their loans and the interest thereon, will be paid when due.|
|5. Customers||Information that enables them to determine whether the amounts owing to them will be paid when due.|
|6. Government and their agencies||Information about the continuance of an enterprise especially when they have a long-term involvement with, or are dependent on the enterprise.|
|7. Public||Information to regulate the activities of enterprises, to determine taxation policies and as the basis of national income and similar statistics.|
Explain qualitative characteristics of financial statement.
Qualitative characteristics of financial statement:
- Qualitative Characteristics are the attributes (features) that makes the information provided by financial statement useful to the users.
- Qualitative Characteristics are as follows:
There are four main qualities & some sub-qualities:
1. Understandability : The information should be readily understandable to those who have reasonable knowledge of business & economic activity.
2. Relevance : Information has relevance when it influences the users decision making. Nature of information & materiality will be considered to decide relevance:
3. Materiality: An information is material (significant) if its misstatement or non-statement can influence decision maker.
Example: Small expenses are clubbed under one head like Office exp./General exp. etc. or Stationery, postage such items are treated as expense and generally no stock is ascertained & adjusted.
4. Reliability : Information is reliable if it is error free, it is unbiased (neutrality) & gives faithful representation.
- Neutrality: If it influences users into predetermined actions, then it is not neutral (then information is biased).
- Faithful Representation : To be reliable it should give in-formation what it purports to give.
- Example: If an asset is shown in Balance Sheet entity must have it.
- Substance over form : Substance of transactions & not merely its legal form should be reflected by information.
- Example: Item purchased under hire-purchase system is treated as an asset from the beginning and depreciation charged even though legal ownership will be transferred only when the last instalment is paid.
- Prudence : Application of prudence will make information neutral & consequently reliable.
- Completeness : To be reliable information should be complete.
5. Comparability : It should be comparable with its own past data & also with other similar enterprises.
What is the role of Chartered Accountants in the society?
Role of accountant in the society
→ An accountant with his education, training, analytical mind and experience is best qualified to provide multiple need-based service to the ever-growing society.
→ The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial planning, company law and procedures but they can act in the fields relating to financial policies, budgetary policies, information technology, Software development and even economic principles.
→ The services rendered by accountants to the society include the following:
- To maintain the Books of Account in a systematic manner.
- To act as a Statutory Auditor (for example under the Companies Act, Income Tax Act, Co-operative Societies Act).
- To act as an Internal Auditor.
- To act as Social Auditor.
- To act as Taxation Advisor.
- To act as Management Accountant.
- To act as Financial Advisor.
- To provide Management Consultancy Services.
- To act as Company Law Advisor.
- To act as Liquidator.
- To act as Arbitrator.
- To act as Management Information System Consultant.
- To act in the held of software development.
Give the relationship of accounting with other disciplines like:
(i) Accounting and Economics:
- Economics is viewed as a science of rational decision making about the use of scarce resources.
- It is concerned with the analysis of efficient use of scarce resources for satisfying human wants.
- Accounting is viewed as a system which provides data to the users to permit informed judgment and decisions.
- Accounting overlaps economics in many respects and contributes a lot in improving the management decision making process.
- However, there exists a wide gulf between economists’ and accountants’ concepts of income and capital.
- Accountants got the ideas of value, income and capital maintenance from economists, but brushed suitably to make them usable in practical circumstances.
(ii) Accounting and Statistics:
- The use of statistics in accounting can be appreciated better in the con-text of the nature of accounting records.
- Accounting information is very precise, it is exact to the last paisa.
- But such precision is not essential for making business decisions and hence statistical approximations are sought.
- In accounts all values are important individually because they relate to business transactions.
- As against this, statistics is concerned with the typical value, behaviour or trend over a period of time or the degree of variation over a series of observations.
- Therefore, wherever a need arises for only broad generalizations or the average of relationships, statistical methods have to be applied to accounting data.
- Accounting records generally take a short-term view of events and are confined to a year while statistical analysis is more useful if a longer view is taken for the purpose of decision making.
- Statistical methods are helpful in developing accounting data and in their interpretation & are useful even in valuation.
- Therefore, the study and application of statistical methods would add extra edge to the accounting data.
(iii) Accounting and Mathematics:
- Knowledge of arithmetic and algebra is a pre-requisite for accounting computation and measurements.
- The fundamental dual aspect concept of accounting is expressed in the form of a mathematical equation, popularly known as ‘accounting equation’.
- With the advent of the computer, mathematics is becoming a vital part of accounting.
- Statistical and econometric models are largely used for developing decision models for the users of accounts.
- The use of the technique of operations research has made accounting all the more mathematical.
- Presently graphs and charts are being extensively used for communicating accounting information.
- In addition to statistical knowledge, knowledge in geometry and trigonometry is also essential to have a better understanding about the accounting communication system.
(iv) Accounting and law:
- An economic entity operates within a legal environment.
- Every country has set of economic, fiscal and labour laws.
- All transactions with suppliers and customers are governed by the Contract Act, the Sale of Goods Act, the Negotiable Instruments Act, etc.
- The entity itself is created and controlled by laws. For example, a partnership business is controlled by Partnership Act and a company is created and controlled by the Companies Act, etc.
- Very often the accounting system to be followed is prescribed by law. For example, the Companies Act has prescribed the format of financial statements of companies and requires accrual principle to be applied.
- However, legal prescription about the accounting system is the product of developments in accounting knowledge.
- That is to say, a legislation about accounting system cannot be enacted unless there is a corresponding development in the accounting discipline.
- In that way accounting influences law and is also influenced by law.
(v) Accounting and Management:
- Management is broad occupational field which comprises many functions and encompasses application of many disciplines including those mentioned above.
- Accountants are well placed in the management and play a key role in the management team.
- A large portion of accounting information is prepared for management decision making.
- In the management team, an accountant is in a better position to understand and use such data.
- In other words, since an accountant plays an active role in management, he understands the data requirements. So the accounting system can be moulded to serve the management purpose.
- ‘Management accounting’ processes accounting data for management . decision making.
- This indicates the linkage between management and accounting.
- Accounting is an essential service function of management.
Limitations of accounting
Limitations of accounting are:
- Accounting is not an exact science.
- It is based on many assumptions & conventions.
- It involves many estimation which results into subjectiveness.
- There are different alternatives possible for the same item which gives scope for manipulation to get desired result.
- It is a post mortem exercise and the information about entities performance and financial position are available quite late i.e. after a year.
- 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 (known as Inflation Accounting).
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 decision requires timely & correct information which is provided by accounts.
- Evaluation: 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.
- Stewardship : The management, manages the money of shareholders/owners, on their behalf.
- Govt, regulation & Taxation : Accounting data serves the various requirements of govt, regulations & to assess proper tax liability.
True or False
Capital is all assets less fictitious assets.
False: Capital is all assets less fictitious assets less external liabilities.
Capital + Long Term Liabilities = Fixed Assets + Current Assets + Cash – Current Liabilities.
False: Because Accounting Equation is:
Capital + Long Term Liabilities + Current Liabilities = Fixed Assets + Current Assets.
Equity + LTL – CL = FA + CA
False: The basic accounting equation is: Equity + LTL + CL = FA + CA.