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s and events which are, in part at least, of a financial character, and interpreting the results thereof The above definition makes an impression that Accounting is an art of record keeping. ( General Journal, Subsidiary Books, Ledger etc)
However the above definition does not reflect properly the role of accounting in the modern society. The scope of Accounting is wider at present than that described above.
Some thoughtful remarks on Accounting: A renowned accountant once observed that Accounting was born without notice and reared in neglect Some say that Accounting was first practiced and then theorized. There are sufficient evidences exist to corroborate the fact that the art and practice of accounting, as a highly developed system, was in vogue in India even during the times of Vedas and Upanishads. A reference needs to be made to a pertinent observation made by Alexander Hamilton F.R.S, the noted Orientalist in the book review in monthly review 26 1798) page 129, he stated as under: We would remark that the Banias of India have been from time immemorial, in possession of the method of book-keeping by double entry and that. (Authors note: Banias mean Businessmen) The birth of double entry book-keeping is suggested to have been at the hands of a Franciscan Monk, Luca Fra Pacioli, an Italian Mathematician, who published a book in 1494, a philosophical and mathematical work, which included a treatise on bookkeeping
Accounting as an Information system: In the present world, Accounting is called the language of business as it is used to serve as a means of communication among people in society. Information as regards financial position (assets minus liabilities), operating results (profit or loss), Cash flows and other information like financial information required by Banks, or when required by any investor etc. So Accounting provides information that is useful in making business and economic decisions for making reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities. It is the principal means of communicating financial information to owners, lenders, managers, Government and its regulatory agencies.
Importance of Accounting:
- Assistance
to Management
- Records rather than memory - Comparison - Aid in legal matters - Help in taxation matters - Sale of a business
Branches of Accounting:
Financial Accounting : It is concerned with the recording of business transactions and the periodic preparation of income statement, balance sheet, and cash flow statement from such records. Cost Accounting : It has been developed to ascertain the costs incurred for carrying out various business activities and to help the management to ensure proper decision making, to exercise strict control, etc. Management Accounting: It is concerned with the interpretation to guide the management for future planning, decision making, control etc. It serves the information needs of the insiders, e.g., owners, managers and employees.
Bases of Accounting:
Cash basis: The net income is calculated as the excess of actual cash receipts in respect of sale of goods, services, properties, etc over the actual cash payments regarding purchase of goods, expenses like rent, electricity, salaries etc. Accrual basis: It means revenue and expenses are taken into consideration for the purpose of income determination on the basis of the accounting period to which they relate. Mixed or hybrid basis of Accounting: Revenues are recognized on cash basis while the expenses are recorded on accrual basis. The purpose is to remain cautious, safe and hundred percent certain for revenue items and make adequate provisions for expenses.
Preparation of vouchers:
In the present age of information technology majority of the business entities use software packages for accounting purposes. The computer takes care of most of the operations like recording in primary books, postings in secondary books, preparation of trial balance and finally even preparation of financial statements. The human intervention normally ends with the preparation of necessary documents. These documents (popularly called vouchers) can be of three types Receipt Voucher, Payment Voucher and Journal Voucher. The receipt voucher is prepared to record all cash and bank receipts. The payment voucher is prepared to record all cash and bank payments. The journal voucher is drawn to record all non-cash transactions and events. The voucher should be filled with all the necessary information minutely so that the computer takes the details correctly.
(Note that the term Debit is derived from the latin word Debeo, meaning amount owed to me, the Proprietor and the term Credit is derived from latin word Credo, meaning trust or believe)
Assets/liabilities/Income/Expenses Explained:
An asset is recognized in a financial statement if it satisfies the following two conditions. The asset has a cost or value that can be reliably measured and It is expected that the future economic benefits will flow to the enterprise out of the use of that asset. For example: the investments made by an enterprise in acquiring a building for official purposes is an asset because future economic benefits will be derived from the use of that building and the building has a definite cost. A Liability is recognized if the following conditions are satisfied: It is expected that an outflow of resources embodying economic benefits will result from the settlement of a present obligation, and The amount of settlement can be reliably measured. The amount at which equity is shown in the balance sheet is dependant on the measurement of assets and liabilities.