sCOPE AND NATURE OF ACCOUNTING

VEANING, OBJECTIVES, 1.11

their
(0) Gorvernment and Govemment and ttheir agencies need information to
Agencies torm policies relating to laxation, allocation of
resources and for providing subsidics etc.
o)) Social responsibility They nccd information on the impact on environment
uroups (such as environ-and the steps taken by the cnterprise for the protection
mental protecion groups) of cnvironment.
(v) Public An enterprise allects the public in a varicty of ways
such as a provider of cmployment. provider of
amenitics in the locality and bcing the customer to
local supplicrs. Hence, public at large is interested in
knowing the future plans of the cnterprise.
(i) Competitors They vant information on the relative strengths and
weaknesses of the enterprise and for making
comparisons.
provides information to all the
As an information system, the accounting process
business-enterprise. Such information helps the
ISers whether inside or outside the
various decisions. The information is
Users of the information in making as profit and loss account,
communicated through various financial statements such statements
statement etc. The financial
halance sheet, fund flow statement, cash flovw
However, the frequency of their preparation
are normally prepared on yearly basis. example, the sales manager may require
depends on the needs of their users. For the needs of investors, creditors
monthly oreven weekly information of sales whereas
satistied by annual financial statements. In order to make the information
etc. will be statements are
understandable and meaningful, various items of financial
more
graphs, charts etc.
presented in the form of ratios, percentages,
Advantages or Uses of Accounting
Acconting offers the following advantages : Management needs a lot of
Helpful in Management of Business
Y
the efficient running of the business. All such information is provided
information for
management in the following
by the accounting which helps the would like to know whether the sales
are
Planning :- Management
A) Helpful in increase in the cOstof production.
increasing or decreasing and also the speed of the accounting, which helps the
information is provided by to
All such sales and expenses. It also helps them
management in eslimating the future
cash receipts and cash disbursements during the next accounting
estimate the
period.
Making : AL times, the Management has to take a
2) Helpful in Decision
should be the selling price of the
number of decisions. For example, What
ollered to the custoners? Accounting
product? How much discount shouldbelor making such decisions.
provides all the infornationsrequired
Management would Iike lo sec that the cost
) Helpful in Controlling IS OVerspending. AccountinÆ
incurred is reasonable and that no department
managemnt in this regard.
provides informationtothe
 1.12 MEANING, 0BJECTIVES, SCOPE AND
NATURE OF
2Proyides Complete and Svstematie Record :Business transaction.,
groisn in size and complexity and it is not possible to remember each
AC OUNTING
transaction. Accounting keeps a pronpt and systematic record of all the and every
and summarizes themin order to provide atrue picture of the activities of
entity. the transbusactiinoesns
(3 Information Regardng Profit or Loss : Accounting reports the
of business activities of an accounting period. The Profit & Loss net result
Account
the end of cach accounting period disclosesthe net profit carned or loss prepared
:suffered at
that period. The information regarding profit is of great use to the owners and var s
other interested parties.
during
(9 lnformation Regarding Financial Position Accounting reports th.
finahcial position of the business by preparing a Balance Sheet at the end of est
accounting period. Balance Sheet discloses the position of assets and their values o
the one h¡nd and liabilities and capital on the other hand.
Enables Comparative Study : By keeping a systematic record
helps the owners to compare one year'scosts, expenses, sales and profit etc. accountino
with those
of other years. Such a comparison provides the useful
informations on the basis of
which important decisions can be taken more judiciously.
6 Helpiul in Assessment of Tax Liability :-Properly
be of great help when the firm is assessed to Income Tax or GST.
maintained records will
Such records when
audited are trusted by the taxation authorities.
A1) Evidence in Legal Matters Properly maintained accounts, supported by
authenticated documents are accepted by the courts as a firm evidence.
(8 Facilitates Sale of Business : If a business entity is
being sold, the
accounting information can be utilised to determine the proper purchase price.
(9Helpful in Raising LoansAccounting information is of great help white
raising loans from banks or other financial institutions. Such
sanctioning loan screen various financial statements of the firm suchinstitutions before
as final accounts,
fund flow statement, cash flow statement etc.
M0) Helpful in Partnership Accounts - Accounting
records provide all the
information needed at the time of admission of apartner. retirement or death of d
partner and dissolution of the firm. Goodwill of the firm is also
valued on the basIS O!
accountingrecords.
MI) Hclpful in Prevention and Detection of Errors and Frauds.
Limitations of Accounting
As discussed above, accounting provides
financial soundness of aconcern to the owners information about theparties.
and other interested profitability
In addition,
it provides various other valuable
limitations which must be kept informations also. Hlowever,
in mind while using such accounting
has These
limitations arc as follows informations.
Influenced by Personal Judgements Accounting is as yet an exact
sCience and accountant has to exercise his personal judgement in respect of various
items. Ior examplc, it is extremely diflicult to predict with any degree of accuracy the
actual useful life of an asset which is necded tor calculating depreciation. The same is
MEANING, 0BJECTIVES, SCOPE AND NATURE OF ACCOUNTING
true
about method of
valuation of
stock and making
1.13

pitferent persons are bound to have provision for doubtful debts.

hence it will result in
ascertainment different opinions
of different in respect of such things and
difierent persons. Hencethe figure of figure of profit or loss of abusiness by
profit
Based on Accounting Concepts andcannot be taken as an exxact figure.
the basis of a number of Conventions :- Accounts are prepared
profitability and the financial accounting
position
concepts and conventions. Hence, the
Cxample, fixed discloscd by
assets are shown in the balance sheet it may, not be realistic. For
oncent'. This mcans that the fixed assets arc shown ataccording to the'historical cost
their cost and pot at their
market valuc. The values realised on their sale may
be more or less than the values
statedinthe balance sheet. Sinmilarly, on
account of Convention of conservatism, the
nrofit & loss account does not disclose the true profit of the
business because future
losses are provided whereas future incomes are ignored.
6) Incomplete Information Accounting statements provide only the
incomplete information because the actual profit or loss of a business can be known
only when the business is closed down.
4) Omission of Qualitative Informations : Accounts contain only those
informations which can be expressed in terms of money. Qualitative aspects of
business units arecompletely omitted from the books as these cannot be expressedin
monetary terms. Thus, changes in management, reputation of the business, cordial
management-labour relations, firm's ability to develop new products, efficiency of
management, satisfaction of firm's customers etc. which have a vital bearing on the
profitability of the firm are all ignored and omitted from being recorded because all of
these are qualitative in nature.
Ñ)Based on Historical CostsAccounts are prepared onthe basis of historical
costs (i.e., the original costs) and as such the figures given in financial statements do
not show the effect of changes in price level. The assets remain undervalued in many
sheet
cases particularly land and building. The outcome of this practice is that balance
business.
values of assets are not helpful in estimating the true financial position of the

6) Affected by Window Dressing:-Window dressing refersatomore the practice of

favourable
manipulating accounts, so that the financial statements may disclose
made at the end of the
position than the actual position. For example, the purchases
be over-valued. Hence, correct
year may not be recorded or the closing stock may statements.
decisions cannot be taken on the basis of such financial
only a record of past
)Unsuitable for Forecasting :- Financial Accounts are
of the product, policies adopted
events. Continuous changes take place in the demand the tfinancial analvsis based on
etc. As such,
by the firm, the position of competitionforecasting.
much usefor
Past events may not be of
Accounting
Qualitative Characteristics (Attrilbutes) of
Information
in sucha way that it is
Accounting information should be prepared and presented enterprise. Following
business
able to depict a clear and orderly view ol the uselul for its users :
accounting inlormation make it
Characteristics of nore
1,14 MEANING, OBJECTIVES, SCOPE AND NATURE OF ACCOUNTINC
(1) Reiabiity : Accouning infomation must be reliable. Rcliability iplies
is oi
that the inlornation must be factual and verifiable. The accounting information
documents siuot
source
to have veritiability if such information can be vCrificd from
cash memos, purchase invoices, sales invoices, correspondence, agreements, pront
decd amd other similar documents, Verifiability ensures the truthlulness of h
recorded transactions which can be independently checked by anyone interested t
ascertain the rue position. But if the source documents are not availablc the
accounting intornation disclosed by profit and loss account and balance shect will nes
be capable of being verificd and it would imply that it cannot be relied on.
Some accounting records arc most rcliable while others are not. For cxamnl.
recording of fixcd assets at actual cost is most reliable since the same can h.
independently veritied from property deed. But it is not true for some other
transactions because accounting is not an exact science. For cxample, depreciation
charged on fixed asset cannot be independently verificd since it is based on estimatel
usetul lite of the asset which requires personal judgement. Personal judgement is also
requircd while valuing stock and making provision for doubtul debts. In order to
ensure reliability in suclh transactions the personal judgements must be free from bias
(2) Relevance:- Accounting informations depicted by financial statements must
be relevant to the objectives of the enterprise. Unnecessary and irrelevant informations
should no be inetuded in financial statements. To be relevant, information must be
capable of making difference in decision, that is, it must help the management
inNvestors, creditors and other users of the accounting information in making decisions.
For example, the information regarding the rate of dividend paid by a company in
previous years is a relevant information for the investors since it provides a basis for
forecasting future dividends. Similarly, while reporting debtors in the balance sheet.i
is the total amount of debtors which is relevant and not the number of debtors.
An accountant is usually faced with the problem of choosing the relevant data
from the mass of data because the needs of different users may be different. For
example, the information required by bankers will not necessarily be the same as
required by investors. Hence the accountant will have to study the needs of various
users and find out which information is common and relevant to all the users. In
addition, adifficulty arises in deciding as to whose needs should be given priority. For
example, certain information regarding the profitability may be relevant to creditors
but its disclosure may be harmful to the interests of shareholders as it may give vital
cluesto thecompetitors. While taking a decisionin this matter the accountant will be
guided by the concepts of truth, justice and fairness.
(3) Understandability : Accounting informations should be presented in such
asimple and logical manner that they are understood casily by their users such as
investors, lenders, employees ctc. A person who does not have any knowledge o!
accounting terminology should also be able to understand them without nuch
difficulty. This can be done by giving relevant explanatory notes to explam tie
information given in financial statements. General topics which should be included in
explanatory notes are method of depreciation, method of valuation of inventor):
deseriplion of contingent liabilities, explanation of reserves,the commen
balance sheet
extraordinary gains and losses, disclosure of events OCcUrring afier
 MEANING, 0BJECTIVES, SCOPE AND NATURE OF
ACCOUNTING 1.15
date ctc. These explanatory notes make the financial
understandable. statements more Useful and
(4) Comparability - Comparability is avery
information. The inancial statements useful quality of the accounting
should contain the
alongwith the figures of current year so that the current figures of previous year
Uh Dastpertormance. Similarly, the performance can be compared
financial statements
IYthat the profitability and financial position ofthe should be prepared in such
other concerns of the similar type. concern may be compared with
Comparison
the business entity. Comparability is possible revcals the strong and weak points of
when different firms in the same
industry adopt the same accounting principles from year to year. For example, if
diminishing balance method of charging depreciation is selected, it
changed fromyear to year. Similarly the method of valuation of stock should not be
should also be
consistently the same from year to year. However, the consistency principle does not
mean that a particular methodonce adopted should never be changed. When change in
method is desirable for the purpose of better preparing and reporting the accounting
information, it should be changed. In such a case, the nature and effect of change and
the justification for change must be stated clearly by way of footnotes to enable the
users of accounting information to be aware of such change.
(5) Faithful Presentation Financial statements are required to show a Frue
and fair view of the profitability, financial position and cash flows of an enterprise
Application of appropriate accounting standards normally results in financial
statements portraying true and fair view of information about an enterprise.
In addition to the above, accounting information should also have the
characteristics of timeliness, neutrality and completeness.
Role of Accounting
Role of accounting has been changing with the changes in business environment
and increasing social demands. Over the centuries, the role of accounting remained
confined to the record keeping of financial transactions only. But, today's rapidly
Changing business environment has changed the role of accounting and at present the
accounting plays the following different roles:
Role of a Lagnaze Accounting is viewed as a language of business
information regarding
beCause il prepares reports and statements which communicate
the business enterprisc,
)Role of istoricat Reeord : Accounting is viewed as clronological record
according to speciticd rules,
all financial transactionsin the books of accounts
It is also regarded as a means of
6) Role of Deteruinip the Net P'roit enterprise.
determining the lrue profit or loss of abusiness
oition: I Is also regrded as ameans
) Role of Deterivip theinneil business by the preparation of BalanceSheet.
LSHoWigthe linancial position of the
Accounting is OW regarded as an
) Role of Inioroation Systet providing the kind ol information
which
is capable of
information system because it
require lor taking appropriate decisions.
gers and other interested parties