Scope of Accounting:

Accounting has got a very wide scope and area of application. Its use is not confined to the business
world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any
social institution or professional activity, whether that is profit earning or not, financial transactions
must take place. So there arises the need for recording and summarizing these transactions when they
occur and the necessity of finding out the net result of the same after the expiry of a certain fixed
period. Besides, the is also the need for interpretation and communication of those information to the
appropriate persons. Only accounting use can help overcome these problems.
In the modern world, accounting system is practiced no only in all the business institutions but also in
many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative
Society etc.and also Government and Local Self-Government in the form of Municipality, Panchayat.The
professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also
adopt some suitable types of accounting methods. As a matter of fact, accounting methods are used by
all who are involved in a series of financial transactions.
The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As
accounting is a dynamic subject, its scope and area of operation have been always increasing keeping
pace with the changes in socio-economic changes. As a result of continuous research in this field the
new areas of application of accounting principles and policies are emerged. National accounting, human
resources accounting and social Accounting are examples of the new areas of application of accounting
systems.

Nature of Accounting:
We know Accounting is the systematic recording of financial transactions and presentation of the
related information of the appropriate persons. The basic features of accounting are as follows:
1. Accounting is a process: A process refers to the method of performing any specific job step by step
according to the objectives, or target. Accounting is identified as a process as it performs the specific
task of collecting, processing and communicating financial information. In doing so, it follows some
definite steps like collection of data recording, classification summarization, finalization and reporting.
2. Accounting is an art: Accounting is an art of recording, classifying, summarizing and finalizing the
financial data. The word art refers to the way of performing something. It is a behavioral knowledge
involving certain creativity and skill that may help us to attain some specific objectives. Accounting is a
systematic method consisting of definite techniques and its proper application requires applied skill and
expertise. So, by nature accounting is an art.
3. Accounting is means and not an end: Accounting finds out the financial results and position of an
entity and the same time, it communicates this information to its users. The users then take their own
decisions on the basis of such information. So, it can be said that mere keeping of accounts can be the
primary objective of any person or entity. On the other hand, the main objective may be identified as
taking decisions on the basis of financial information supplied by accounting. Thus, accounting itself is
not an objective, it helps attaining a specific objective. So it is said the accounting is a means to an end
and it is not an end in itself.
4. Accounting deals with financial information and transactions; Accounting records the financial
transactions and date after classifying the same and finalizes their result for a definite period for
conveying them to their users. So, from starting to the end, at every stage, accounting deals with
financial information. Only financial information is its subject matter. It does not deal with non-
monetary information of non-financial aspect.
5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of
information. As a service function, it collects processes and communicates financial information of any
entity. This discipline of knowledge has been evolved out to meet the need of financial information
required by different interested groups.

Bank reconciliations compare bank's records (from bank statements) with the company's general
ledger (cash accounts). In this case an external source (bank statements) is used in preparing
reconciliations. Bank reconciliations assist in ensuring that the companys records (general ledger cash
account, etc.) and the banks records are complete and correct.
General ledger to sub-ledger reconciliations agree general ledger balance with the total of a sub-ledger
(i.e., supporting schedules, etc.). This type is the most suitable for accounts receivables, accounts
payables, fixed assets, prepaid accounts, and so on. In this case an internal source (sub-ledger) is used
and compared to the ledger balance.

Basic Accounting Principles and Guidelines
Since GAAP is founded on the basic accounting principles and guidelines, we can better understand
GAAP if we understand those accounting principles. The following is a list of the ten main accounting
principles and guidelines together with a highly condensed explanation of each.
1. Economic Entity Assumption

The accountant keeps all of the business transactions of a sole proprietorship separate from the
business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are
considered to be one entity, but for accounting purposes they are considered to be two separate
entities.

2. Monetary Unit Assumption

Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars
are recorded.
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not
changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For
example, dollars from a 1960 transaction are combined (or shown) with dollars from a 2013 transaction.





3. Time Period Assumption

This accounting principle assumes that it is possible to report the complex and ongoing activities of a
business in relatively short, distinct time intervals such as the five months ended May 31, 2013, or the 5
weeks ended May 1, 2013. The shorter the time interval, the more likely the need for the accountant to
estimate amounts relevant to that period. For example, the property tax bill is received on December 15
of each year. On the income statement for the year ended December 31, 2012, the amount is known;
but for the income statement for the three months ended March 31, 2013, the amount was not known
and an estimate had to be used.
It is imperative that the time interval (or period of time) be shown in the heading of each income
statement, statement of stockholders' equity, and statement of cash flows. Labeling one of
these financial statements with "December 31" is not good enoughthe reader needs to know if the
statement covers the one week ended December 31, 2012 the month ended December 31, 2012
the three months ended December 31, 2012 or theyear ended December 31, 2012.
4. Cost Principle

From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash
equivalent) when an item was originally obtained, whether that purchase happened last year or thirty
years ago. For this reason, the amounts shown on financial statements are referred to as historical cost
amounts.
Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a
general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset
amount does not reflect the amount of money a company would receive if it were to sell the asset at
today's market value. (An exception is certain investments in stocks and bonds that are actively traded
on a stock exchange.) If you want to know the current value of a company's long-term assets, you will
not get this information from a company's financial statementsyou need to look elsewhere, perhaps to
a third-party appraiser.
5. Full Disclosure Principle

If certain information is important to an investor or lender using the financial statements, that
information should be disclosed within the statement or in the notes to the statement. It is because of
this basic accounting principle that numerous pages of "footnotes" are often attached to financial
statements.
As an example, let's say a company is named in a lawsuit that demands a significant amount of money.
When the financial statements are prepared it is not clear whether the company will be able to defend
itself or whether it might lose the lawsuit. As a result of these conditions and because of the full
disclosure principle the lawsuit will be described in the notes to the financial statements.
A company usually lists its significant accounting policies as the first note to its financial statements.

6. Going Concern Principle

This accounting principle assumes that a company will continue to exist long enough to carry out its
objectives and commitments and will not liquidate in the foreseeable future. If the company's financial
situation is such that the accountant believes the company will not be able to continue on, the
accountant is required to disclose this assessment.
The going concern principle allows the company to defer some of its prepaid expenses until future
accounting periods.
7. Matching Principle

This accounting principle requires companies to use the accrual basis of accounting. The matching
principle requires that expenses be matched with revenues. For example, sales commissions expense
should be reported in the period when the sales were made (and not reported in the period when the
commissions were paid). Wages to employees are reported as an expense in the week when the
employees worked and not in the week when the employees are paid. If a company agrees to give its
employees 1% of its 2013 revenues as a bonus on January 15, 2014, the company should report the
bonus as an expense in 2013 and the amount unpaid at December 31, 2013 as a liability. (The expense is
occurring as the sales are occurring.)
Because we cannot measure the future economic benefit of things such as advertisements (and thereby
we cannot match the ad expense with related future revenues), the accountant charges the ad amount
to expense in the period that the ad is run.

8. Revenue Recognition Principle

Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are
recognized as soon as a product has been sold or a service has been performed, regardless of when the
money is actually received. Under this basic accounting principle, a company could earn and report
$20,000 of revenue in its first month of operation but receive $0 in actual cash in that month.
For example, if ABC Consulting completes its service at an agreed price of $1,000, ABC should recognize
$1,000 of revenue as soon as its work is doneit does not matter whether the client pays the $1,000
immediately or in 30 days. Do not confuse revenue with a cash receipt.






9. Materiality

Because of this basic accounting principle or guideline, an accountant might be allowed to violate
another accounting principle if an amount is insignificant. Professional judgment is needed to decide
whether an amount is insignificant or immaterial.
An example of an obviously immaterial item is the purchase of a $150 printer by a highly profitable
multi-million dollar company. Because the printer will be used for five years, the matching principle
directs the accountant to expense the cost over the five-year period. The materiality guideline allows
this company to violate the matching principle and to expense the entire cost of $150 in the year it is
purchased. The justification is that no one would consider it misleading if $150 is expensed in the first
year instead of $30 being expensed in each of the five years that it is used.
Because of materiality, financial statements usually show amounts rounded to the nearest dollar, to the
nearest thousand, or to the nearest million dollars depending on the size of the company.
10. Conservatism

If a situation arises where there are two acceptable alternatives for reporting an item, conservatism
directs the accountant to choose the alternative that will result in less net income and/or less asset
amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be
conservative. Accountants are expected to be unbiased and objective.
The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it
does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on
the financial statements or in the notes, but potential gains will not be reported. Also, an accountant
may write inventory down to an amount that is lower than the original cost, but will not write
inventory up to an amount higher than the original cost.








Qualitative characteristics of financial report
Understandability. The information must be readily understandable to users of the financial statements.
This means that information must be clearly presented, with additional information supplied in the
supporting footnotes as needed to assist in clarification.
Relevance. The information must be relevant to the needs of the users, which is the case when the
information influences the economic decisions of users. This may involve reporting particularly relevant
information, or information whose omission or misstatement could influence the economic decisions of
users.
Reliability. The information must be free of material error and bias, and not misleading. Thus, the
information should faithfully represent transactions and other events, reflect the underlying substance
of events, and prudently represent estimates and uncertainties through proper disclosure.
Comparability. The information must be comparable to the financial information presented for other
accounting periods, so that users can identify trends in the performance and financial position of the
reporting entity.
Verifiabilityimplies a consensus among different measurers. implies a consensus among different
measurers. For example, the historical cost of a piece of land to be reported in a company's balance
sheet usually is highly verifiable. The cost can be traced to an exchange transaction, the purchase of the
land. However, the fair value of that land is much more difficult to verify. Appraisers could differ in their
assessment of fair value. The term objectivity often is linked to verifiability. The historical cost of the
land is objective and easy to verify, but the land's fair value is subjective, influenced by the measurer's
past experience and prejudices. A measurement that is subjective is difficult to verify, which makes it
less reliable to users.
Timelinessinformation that is available to users early enough to allow its use in the decision
process. also is important for information to be decision useful. Information is timely when it is
available to users early enough to allow them to use it in their decision process. The need for timely
information requires that companies provide information to external users on a periodic basis. To
enhance timeliness, the SEC requires its registrants to submit financial statement information on a
quarterly as well as on an annual basis for each fiscal year.

FAITHFUL REPRESENTATION. Faithful representation exists when there is agreement between a
measure or description and the phenomenon it purports to represent. For example, assume that the
term inventory in the balance sheet of a retail company is understood by external users to represent
items that are intended for sale in the ordinary course of business. If inventory includes, say, machines
used to produce inventory, then it lacks faithful representation.

the main discussion evolved around the purpose of the Conceptual Framework. As stated in the agenda
paper currently the primary purpose of the Conceptual Framework is to set out concepts that underlie
the preparation and presentation of financial statements as a practical tool to assist the IASB in
developing future IFRSs and reviewing existing IFRSs.

The concern raised by several Board members was that there was too much emphasis on the IASB and
not enough emphasis on other users. In other words the Conceptual framework should also serve
preparers and users of financial statements.
Many see the primary purpose of the Framework as providing a foundation to develop new IFRS. In this
view, the Framework should enhance and ensure the consistency of requirements in IFRS and the
continuity of agreed objectives, assumptions, and concepts for financial reporting, despite changes in
IASB members and staff
The Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities (the
Conceptual Framework) establishes the concepts that underpin general purpose financial reporting
(financial reporting) by public sector entities that adopt the accrual basis of accounting. The
International Public Sector Accounting Standards Board (IPSASB) will apply these concepts in developing
International Public Sector Accounting Standards (IPSASs) and Recommended Practice Guidelines (RPGs)
applicable to the preparation and presentation of general purpose financial reports (GPFRs) of public
sector entities.
Authority of the Conceptual Framework
1.2 The Conceptual Framework does not establish authoritative requirements for financial reporting by
public sector entities that adopt IPSASs, nor does it override the requirements of IPSASs or RPGs.
Authoritative requirements relating to the recognition, measurement and presentation of transactions
and other events and activities that are reported in GPFRs are specified in IPSASs. 1.3 The Conceptual
Framework can provide guidance in dealing with financial reporting issues not dealt with by IPSASs or
RPGs. In these circumstances, preparers and others can refer to and consider the applicability of the
definitions, recognition criteria, measurement principles, and other concepts identified in the
Conceptual Framework.
WHAT IS A CONCEPTUAL FRAMEWORK?
In a broad sense a conceptual framework can be seen as an attempt to define the nature and purpose of
accounting. A conceptual framework must consider the theoretical and conceptual issues surrounding
financial reporting and for m a coherent and consistent foundation that will underpin the development
of accounting standards. It is not surprising that early writings on this subject were mainly from
academics.

Conceptual frameworks can apply to many disciplines, but when specific ally related to financial
reporting, a conceptual framework can be seen as a statement of generally accepted accounting
principles (GAAP) that form a frame of reference for the evaluation of existing practices and the
development of new ones. As the purpose of financial reporting is to provide useful information as a
basis for economic decision making, a conceptual framework will form a theoretical basis for
determining how transactions should be measured (historical value or current value) and reported ie
how they are presented or communicated to users.
The content of the Framework can be summarised as follows:
Identifying the objective of financial statements
The reporting entity (to be issued)
Identifying the parties that use financial statements
The qualitative characteristics that make financial statements useful
The remaining text of the old Framework dealing with elements of financial statements: assets,
liabilities equity income and expenses and when they should be recognised and a discussion of
measurement issues (for example, historic cost, current cost) and the related concept of capital
maintenance.




Economic Entity Assumption Under the economic entity assumption, an economic activity can be
identified to a separate entity accountable for that activity. In other words, this assumption states that
businesses must keep their transactions separate from their owners, business units or other
businesses transactions. For example, the business activities of the neighborhood coffee house are to
be kept separate from the financial activities of its owners or managers. The financial statements for
the coffee house will only reflect the revenue and expenses for the coffee house. Thus, it is possible to
compare the financial statements of this coffeehouse with its competitors reports, since these
statements should be reported separately under the economic entity assumption. Important to note, a
separate entity does not necessary mean a legal entity. For example, financial statements for a parent
company and its subsidiaries (i.e. separate legal entities) can be presented together (i.e. consolidated
financial statements).


Intro. To philosophy
w/ logic

tech. writing
and
business correspondents

r h e t o r I c


financial accounting I



intro. To microeconomics
W/theory

human behavior
in organization

rhency sison
fat 21