Introduction of Accounting

From Mr.Younan Khan, MBA IST Evening

Introduction of Accounting

By Mr.Younan Khan, MBA IST Evening

1. Introduction
2. Learning Objectives
3. Meaning, History ,Scope and Objectives
1. Meaning of Accounting
2. History of Accounting
3. Scope of Accounting
4. Objects of accounting
4. Importance and Use of Accounting in daily life
1. Necessity and importance of accounting
2. Use of accounting in day-to-day life
5. Let's Sum Up
6. Key Points
7. Glossary
8. Practice Test
9. Answers to SAQ
10. References and Further Readings
 Introduction

Everyday we, generally, exchange money and goods in our private and family life and
also in institutions. These acts of giving and taking result in monetary changes to
respective parties in every case. It is necessary to keep record of accounts of monetary
transactions to know how much money has come in or how much money has gone out,
what are the sources the income from or what purpose the expenditure has been incurred
for. Even we need to keep records of transactions to know whether the income has
increased or the expenditure has increased. We shall also keep records of transactions to
know how much we owe to others and how much others owe us. Each and every person
of the society is required to keep some accounts. In the stream of social and economic
activities of today, each and every person or institution in accountable to some one or to
other for his or its economic activities or the wealth acquired, income earned and the
expenditure incurred. Different types of transactions occur in business. Without
maintaining proper accounts, it is neither possible to ascertain profit or loss of the
business nor to know the financial position of the business at any particular date. This
chapter will describe meaning, evaluation ,scope and objects of financial accounting. It
also discusses importance and use of accounting in daily life. Let's go through the entire
chapter and know introduction to financial accounting.

Meaning, Evaluation, Scope and Objectives

Accounting has become a dicipline now-a-days. It passed a long historical process. Now
it implicates our daily lifes, business and social life. Let's discuss all one by one.

Meaning of Accounting

Definition of Accounting: Accounting is both the science and art of correctly recording
in books of accounts all those business transactions that result in the transfer of money or
money’s worth. It may also be defined as the art of recording mercantile transactions in a
regular and systematic manner; the art of keeping accounts in such a manner that a man
may ascertain correct result of his business activities at the end of a definite period and
also can know the true state of affairs of his/her business and properties by an inspection
of his/her books.
Accounting has been defined as, “the art of recording, classifying and summarizing in a
significant manner in terms of money, transactions and events which are, in part at least,
of financial character, and interpreting the results there of. ” This definition has given by
the AICPA. Now we do the following activity:

Now, let's discuss this definition carefully, we could understand the following points.
Hopefully you already noted all of them in your activity.

‘Art’ is a part of our knowledge that helps us to attain our objectives. In business, our
object is to know the financial results. That is we can know by way of recording,
classifying and summarizing the business transactions in the best way.

‘Recording’ transactions in various meaningful ways, as required according to the size of

the organization.

‘The art of classifying’- grouping of transactions or entries of the same nature at one
place.

‘ The art of summarizing’ business transactions, because it has to prepare at least two
summarized statements – (1) Trading and profit & loss Account (to ascertain profit or
loss of that organization) or Income & Expenditure Account (in case of non trading
concerns) and (2) Balance sheet (It shows the position of assets and liabilities of an
organization at a certain date) to make the classified business activities understandable to
the proprietors, management and other interested parties.

‘ Summarizing in a significant manner’ – means that summarizing must be done in such a

way as to create a definite sense and must suit the purpose for which it is done i.e. should
be user friendly.

‘In terms of money’ – because money is the measuring yardstick. [for comparison of
values of different assets of the same concern, comparison with various years result and
with other organizations]

Transactions and events which are, in part at least, of financial character’- Accounting
deals with only financial transactions and events that are able to change the financial
position of that organization; not any non-financial transactions and events)

Transactions may refer to an act of performance, an exchange, a transfer etc. For the
purposes of Accounting only such acts of financial character, capable of being measured
in terms of money, are worth considering.
‘ Interpreting the results’ – Accounting not only creates data through recording,
classifying and summarizing transactions and events, but also uses them by interpreting
through interpretation of results the persons interested can know the trends of the results,
the better of the alternatives, product-mix, comparative advantages etc. The management,
investors and other parties interested in the business also interpret the accounting
information for there own purpose and in different angles.

We discuss this definition part by part to have a comprehensive understanding in

accounting.

More definitions of Accounting:

American Accounting Association (AAA): AAA defines “ Accounting refers to the

process of identifying measuring and communicating economic information to permit
informed judgement and decisions by users of the information.”

According to A.W. Johnson:

“Accounting may be defined as the collection, compilation and systematic recording of
business transactions in terms of money, the preparation of financial reports, the analysis
and interpretation of these reports and the use of these reports for the information and
guidance of management.”

Weygandt, Kieso & Kimmel:

“Accounting as an information system that identifies, records and communicates the
economic events of an organization to interested users.”

This definition views accounting as an information system that identifies and records the
financial transactions, ascertains the results and provides information to the various
interested users in the users desirable way or according to their needs. Basically
accounting is not a recording procedure. It is an information device or tools that works to
provide information to interested users to rationalize their decision-makings.

Activity

Draw a flow-chart on accounting definition.

The modern view of Accounting is, “Accounting seen as a service activity.” It is a link
between business activities and decision-makers.

First, accounting records data on business activity for future use. Second, through data
processing, the data are stored until needed, then processed in such a way a to become
useful information. Third, the information is communicated, through reports, to those
who can use it in making decisions.

A. W. Johnson defined accounting as the collection, compilation and systematic

recording of business transactions in terms of money, the preparation of financial reports,
the analysis and interpretation of these reports for the information and guidance of
management.

You will find two terms: Bookkeeping and Accounting. These two are not same.
Bookkeeping is the art of recording transactions. This is elementary part. Accounting
deals with constructive part of bookkeeping. In fact, bookkeeping is complementary to
the Accounting process. Where bookkeeping is the systematic recording of financial and
economic transactions, Accounting is the analysis and interpretation of bookkeeping
records.

History of Accounting

The history of accounting is as old as the history of human civilization. This journey of
accounting has started on the very day on which the human being has started living in
caves. At that age, occupation of mankind was the collection of fruits and roots and
preying of birds and beasts for their livelihood. Then people used to keep record of their
preyed beasts by drawing lines on the stones inside the cave, snatching on the bark of
trees or making knots with the help of creepers.

Gradually man started to live in the societies on plain lands by leaving caves and started
agriculture. They started to keep record of their produced crop by marking off on the wall
of their houses and making knots with the help of ropes. Step by step the societies
expanded .The demand of mankind started increasing .Exchange system started .Men
started to satisfy their mutual needs by exchange of goods .Then, in ancient India and
Europe man stared to keep accounts by marking on the back of the door panel, drawing
marks on the mud-wall with color or marking on the wood-sticks.
In courts of time, money was introduced as medium of exchange and monetary activities
of man further expanded. Professional merchant classes emerged. Trading started
between persons, institutions at home and abroad in cash and on credit. Writing accounts
of all total purchase and total sales and total assets and total liabilities were started.

Modern accounting was born in the fifteenth century with the development and rapid
expansion of trade and commerce. An Italia priest and philosopher, Luca Pacioli by
name, felt the necessity of specific principles for maintaining accounts and in 1494
included a section on accounting in his book entitled, “Summa De Arithmetica Geometria
Proportiona Proportionalitate”. In that section he explained the basic principles of Double
–Entry System of Bookkeeping. Though the present day system of keeping accounts was
first introduced in the city of Venice in the Republic of Italy, the use of double entry
system of book-keeping came into practice in different parts of the world within a short
time. Since then different methods of keeping accounts are being practiced on the basis of
modern accounting following the double entry system invented by Lucal De Pacioli.
With the progress of science, technology and trade and commerce, much improvement
has taken place in the technique of accounting and continuous efforts are in process for
its further improvement.

Scope of Accounting

The scope of field of accounting is very wide. Accounting is needed not only by business
class but also by non-business class. Starting from the private life of a man, the fincnacial
activities of school, college, club, society, hospitals and government institutions come
within the purview of accounting. The jurisdiction of accounting also includes the
financial activities of professionals including doctors, engineers and layers. The monetary
transactions which take place in the private life of a man are recorded properly in the
books of accounts; it becomes possible to ascertain his receipts and expenditure as well as
personal assets and properly in the books of accounts, it becomes to ascertain his receipts
and expenditure as well as his personal assets and liabilities. When the financial
transactions of a business. It is essential to maintain accounts of non-profit organizations
like school, college, hospital, club, society etc. In the same way, it is necessary to keep
accounts of professionals like service-holders, doctors, lawyers, actors/actress etc. to
ascertain their incomes and calculation of income-tax on the basis of those incomes.
Maintaining accounting is practiced to determine the income and expenditure of different
government offices and public bodies as well as to run those offices and organizations
properly. By preparing and evaluating national plan and budget with the help of
accounting it is possible to know the development and deterioration of the country.
Hence, in a nutshell, we can say that the scope of accounting is wide enough to cover all
the fields of the society.

Objects of accounting
The principal object of accounting is to keep permanent record of all monetary
transactions effected by a person ort enterprise during a definite period and ascertainment
of results of those transactions at the end of the said period,. The main objects of
accounting are enumerated bellow:

1. Proper recording of transactions: The first and foremost object of accounting is to

keep record of monetary transactions in a systematic manner.
2. Determination of results: Every person or institution is always interested to know
the results of his/its monetary transactions at the end of a definite period. So,
ascertainment of result of financial transactions is an important object of
accounting.
3. Ascertainment of financial position: another object of accounting is the
ascertainment of debtors and creditors, assets and liabilities and the overall
financial position.
4. Supplying financial information: another important object of accounting is to
make available all sorts of financial reports and statement to all parties interested
in the affairs of the concerned institution as soon as possible after preparing those
reports and statements.
5. Defalcation prevented: Another special object of accounting is the prevention of
defalcation of money made through fraud by the officials of the institution as well
as control of expenditure.

Importance and Use of Accounting in daily life

Accounting has become part of our daily activities as it implicates monitary transactions
of life. People spend money, invest money for future; all these require proper accounting.
Let's discuss the matter in details.

Necessity and importance of accounting

The necessity and importance of accounting is limitless or unbounded to men in their

day-to-day personal life, family-life, and intuitional life. The necessity of accounting is
described bellow:
(a) Institutional Necessity

• Accounting supplies numerical information to the institution relating to its

management and administration
• Exact results of the institution are disclosed through accounting
• The firm can ascertain the financial status of the business operation
• Firm can compare the financial position of two/more years
• Books accounts are very valuable documents
• Proper accounting makes the firm credible to other party
 • Tax authority can assess taxes for the firm using the accounting information
• Firm can determine the actual assets and liabilities
• Using accounting data a firm can formulate policy and take many decision on
future operation

Use of accounting in day-to-day life

• Someone can ensure smooth financial management in his life
• He/she can bring financial solvency because financial plan helps to be economical
• Accounting helps in preparing personal budget
• Accounting promote saving habits
• Accounting helps to solve family and social disputes as it provides for authentic
records

Accounting: whether Science or Arts

There is a great controversy whether accounting is science or arts. According to some
scholars accounting is science, someone is describing accounting as arts. But actually
accounting is a composition of both science and arts.

Why accounting is ‘Science’:

Science refers systematic process. In scientific activities it follows certain rules-
Observation, analysis, taking actions and then evaluation of activities. Like scientific
activities before taking any action accounting observes the activities, analysis the various
alternatives, choosing the best alternatives and taking feed back to evaluate the
performance. So accounting is termed as science

Nature of Accounting Information:

The following characteristics are pre-requisite for events and transactions to become
accounting information:

1. Accounting Information must be able to change the financial position of an

organization. Two type of change may occur:

(a) Net change: The events or transactions that change the position of assets and
liabilities of the organization, is called the net change.

End.