Define Accounting. Discuss the nature and scope of accounting.
Accounting may be defined as the process of collecting, recording, summarizing and communicating financial information.
Accounting is nothing but a means of communicating the results of business operations to varies parties interested in or connected with the business, viz., the owner, creditors, investors, government, financial institutions and other agencies. Accounting is, therefore, rightly called as the language of business.
The basis purpose of a language is to serve as a means of communication. Accounting also serve this purpose. Accounting is not only associated with business but also with every body who is interested in keeping an account for the money received and money spent.
Definition of Accounting:
American Institute of Certified Public Accountants (AICPA) defined accounting in 1961 as follows :
Accounting is the art of recording, classifying and sum marising , 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 Accounting Principles Board (APB) defined following words.
Accounting is 27 service activity. Its function is to provide quantitative information, prime & financial in nature, about economic activities that is useful in making economic decision, in making reasoned choices among alternative course of action. Accounting may be defined as the identifying, measuring, recording and communicating of financial information.
Herold Bierman and Allan R. Drebin: Accounting is the science of recording and classifying business transactions and events, primarily of a financial character, and the art of making significant summaries, analysis and interpretations of these transactions and events and communicating the result to persons who must make decisions or form judgments.
Smith and Ashburne: Really speaking Accountancy is an art as well as the science of recording, classifying and sum marising of business transactions which are of a financial character and are expressed in terms of money. It also includes interpretation aspect of the recorded information.
Nature and Scope of Financial Accounting: The nature and scope .of accounting is described in the traditional definition of amounting given 1961 by the AICPA as Accounting is the art of recording, classifying and sum marising significant manner and in terms of money transactions and event with are part at least, of a financial and interpreting the result thereof.
Identifying the Transaction and Events: Accounting identifies transaction and event, which can be expressed ion term of money and bring change in the financial position of a business unit. An event (whether internal or external ) is a happening of a consequence to an entity (e.g, use of raw material for production ) An entity means an economic unit that performs economic activities (e.g, Birla Industries Ltd. TISCO).
Measuring the identified Transaction and Events: Accounting measures the transaction and events in term of money.
Recording: It is the process of entering the transaction and events in the books of original entry in the chronological manner e.g, date wise.
Classifying: It is the process of posting of entries in the ledger so that transaction of similar type are accumulated at one place.
Summarizing: It is concerned with the preparation of Financial Statement such as Income Statement, Balance Sheet and Cash Flow Statement.
Analyzing: It is concerned with the establishment of relationship between the various item or group of items taken from Income statement or Balance Sheet or both. Its purpose is to identify the financial strengths and weakness of the enterprise. It provides the basis for interpretation.
Interpreting: Interpreting is the last stage of accounting process. It is concerned with explaining the meaning and significance of the relationship established by the analysis. In fact, interpretation is the main function of accountant in the present condition since the routine work of recording, classifying and summarizing business transaction business transaction can be easily handled by the electronic devices like computers.
Communicating: It is concerned with the transmission of summarized, analyzed and interpreted information to the user to enable them to make reasoned decisions.