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Accounting

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Accounting
Accounting

The concept of accounting is broader than book keeping. Accounting is concerned with the act of recording, classifying and summarizing the financial transactions of a business to know its profit or loss and financial positionwhere as book-keeping is concerned only with the act of recording the financial transactions systematically.

The following are some of the main definitions of accounting:

"An accounting system is a means of collecting, summarizing, analyzing and reporting in monetary terms, information about the business." -R. N. Anthony

"Accounting may be seen as consisting of recording, classification, presentation and interpretation of financial information." -Lewis and Gillespie

Features of Accounting

The following are the features of accounting:

  • Financial character
    Accounting deals only with the financial transactions. Any transactions that is not considered as accounting which is not expressed in monetary terms.
  • Continuous process
    Accounting is a process of recording, classifying and summarizing a financial transaction regularly in a systematic manner. it is an continuous process.
  • Analysis and interpretation
    Accounting also helps to analysis and interpret the result of the business from the data found in financial statements of the business. It finds the conclusions about the profitability and financial position.
  • Historical in nature
    Accounting keeps the records of those transaction which is historical in nature.
  • Based on principle
    Accounting is based on certain principles. This principle guided how transactions should be recorded and reported.

Objectives or Functions of Accounting

The following are the objectives of accounting:

  • To keep complete and systematic record
    The objective of the accounting is to keep a record of all financial transactions in a systematic manner. The recorded transaction is used for future reference and also to avoid the possibility of errors and frauds.
  • To ascertain profit or loss
    To ascertain the profit or loss of the organization at the end of the accounting period is the objective of the accounting.
  • To analyze and interpret the financial information
    Accounting provides different important information to the users about the operating results and financial position of the business which helps them to take financial decision.
  • To help in determination of tax liability
    Every organization needs to pay taxes to the government. So, the accounting provides necessary information which helps to determine the amount of tax liability.
  • To depict the financial position
    Accounting prepares a statement called balance sheet which is the statement of capital, liabilitiesand assets of the business. This helps to know the financial position of the business.

Scope of Accounting

The scope of accounting is very wide. Generally, it covers the following areas:

  • Accounting for business organizations
    Business organizationsis established with the objective of earning profit. So, it is important for them to known the profit and loss of the organization. Therefore, accounting is useful for determining profits or losses of such organizations.
  • Accounting for non-trading organizations
    Non-trading organizationslike hospitals, clubs, societies, educational institutions etc. are established to provide services to the general public. The non-trading organization also have to prepare ‘Income and Expenditure Account’ to present their incomes and expenditures for a particular period. They also prepare balance sheet to know their financial position. So, accounting helps to records all those expenditure and income and show the financial position.
  • Accounting for government
    The government has the biggest responsibility for providing welfare, services, peace, security, justice, etc., to the people. For this, the government uses several financial resources. Accounting system which is used in government organizations is known as ‘Government Accounting’.
  • Accounting for non-government organizations Non-government organization also plays important role in the development of the country. The accounting system which is used in non-government organization is known as 'Fund Accounting'.
  • Accounting for professionals and individuals
    Accounting is also useful to the professionals and individuals to exhibit their professional and personal efficiency. Professionals are engaged in the job of specialized knowledge and skills, called professional skills such as medical, engineering, accounting, research etc. Similarly, individuals are also engaged in financial activities for the maintenance of life. Professionals need accounting to measure their accounting activities and for tax purpose while individuals need accounting for personal financial decisions.

Importance or Advantages of Accounting

The importance or advantages of accounting are as follows:

  • Complete record
    Accounting facilitates the replacement of human memory by maintaining the complete record of financial transactions. Human memory is limited by its very nature. Accounting helps to overcome this limitation.
  • Knowledge of profitability
    Accounting prepares the Profit and Loss Account or Income Statement which hepls to ascertain the profit and loss of the organization.
  • Knowledge of financial position
    Accounting prepares Balance Sheet or Position Statement which helps to find the financial position of the organization.
  • Reduction in errors
    Accounting record all financial transactions scientifically and systematically which finds errors and frauds that took place in the organization and also take steps to prevent them.
  • Helpful in decision-making
    Accounting provides different important informations that can be used to take decisions for future. Similarly, accounting helps the management in planning and controlling business activities.
  • Availability of information
    Accounting communicate information to the management, creditors, employees and the government to serve the onterest of a business as a whole.



  • Accounting is concerned with the act of recording, classifying and summarizing the financial transactions of a business to know its profit or loss and financial position. 
  • Accounting deals only with those transactions which have financial character.
  • Accounting also involves analysis and interpretation of the result of the business.
  • Accounting facilitates the replacement of human memory by maintaining a complete record of financial transactions. 

 

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Very Short Questions

The advantages of accounting are explained below:-

  1. Accessing the performance of the business
    Accounting keeps a proper and systematic record of all business transactions. The income statement is prepared with these records and we are able to know the profit earned and the loss suffered by the business.

  2. Documentary evidence
    Accounting records can be used as an evidence in the court to substantiate the claim of the business. These records are based on documentary proof. In this way, the court accepts these records as evidence.

  3. Facilitating the sale of the business
    The position statement of the business shows the value of assets and liabilities of the business. Accounting facilities in the calculation of the consideration for which the business should be sold.

Any three objectives of accounting are:

  • To analyze and interpret the financial information
    It analyzes and interprets the result of the business to draw conclusions with the help of such conclusions the parties concerned in the business can have full information about its profitability and financial position.

  • To help in determination of tax liability
    Business has to pay different types of tax to the government. It provides the financial information to tax authorities to determine tax liability.

  • To depict the financial position
    A concern, whether trading or non-trading should know it’s true financial positions. For this purpose, it prepares a balance sheet at the end of every year which informs about its positions of assets, liabilities and capital and reflects the economic strength and weaknesses of the business.

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  • Accounting is broader than ______.

    subsidiary books


    journalizing


    book-keeping


    ledger


  • Which one of the following is the feature of accounting?

    Based on principle


    Continuous process


    Financial character


    All the options are character


  • Which one of them is the objective of accounting?

    To ascertain profit or loss


    All the options are correct


    To analyze and interpret the financial information


    To keep complete and systematic record


  • The government has the biggest responsibility for providing ______ to the people.

    services 


    all the options are correct


    peace 


    welfare 


  • Accounting facilitates to ascertain net results about the profit or loss of operation by preparing ______.

    Budget Sheet


    Trading Account


    Profit and Loss Account


    Balance Sheet


  • Accounting facilitates to show financial position of the organization by preparing ______.

    Trading Account


    Bank Cash Book


    Balance Sheet


    Profit and Loss Account


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