Concept / Meaning of accounting

Accounting is an art of recording, classifying, and reporting of financial

transactions of an entity with the aim of showing it’s financial position to various
related parties. It is a procedure of keeping systematic records of financial
information and giving them to decision makers for good decision making.
Accounting is different to book keeping. Book keeping includes only four activities
i.e. identifying, measuring, recording and classifying the transactions of financial
character. But accounting is wider term. It includes book keeping and further
includes summarizing, analysis, interpretation of financial data and
communicating of financial information. Thus accounting includes identifying,
measuring, recording, classifying, summarizing, analyzing, interpretation and
communicating the financial transactions of an entity.
According to R. N. anthony: “accounting system is a means of collecting,
summarizing, analyzing and reporting in monetary terms the information of the
business.”
As conclusion accounting is a science of recording transaction of economic nature
in a systematic manner and also an art of analyzing and interpreting them.
 Features of Accounting
Main features of accounting are as follows:
1. Records the financial transactions only.
2. It is a continuous process.
3. Analysis and interpretation.
4. Historical in nature.
5. Based on generally accepted accounting
principles.
 Objectives of Accounting/Functions of
Accounting
The primary objectives of accounting are as follows :
1. To maintain record of economic transactions:
Now - a – days the volume of transaction is so large that a
human memory can not absorb each and every
transaction. So it is very essential to keep proper and
complete records of all business transactions. These
records can be used as and when required by the persons
interested in the business. there fore, the main objective
of accounting is to maintain proper record of economic
transactions using specified rules for future reference.
 2. To ascertain the operating results:

• Profit is a measure of the performance of an

enterprise. To ascertain profit or loss made by
an enterprise at the end of accounting period
is the next objective of accounting. For this
purpose trading a/c and p/l a/c or income
statement are prepared.
 3. To provide information to the users:
• Accounting communicates the information to
different users. The information may be used by
internal and external parties. The internal users
includes all the organizational participants at all
levels of mgmt. The officers and staff of an
enterprise need useful and timely information
for making different types of business decision.
The external users includes the investors,
lenders, government, financial institutions etc.
4. Presentation of the financial position:

• Other objective of accounting is to show the

financial position of an economy entity.
Accounting shows the financial position by
preparing balance - sheet. Balance-sheet is a
statement of assets and liabilities which also
shows the position of the capital and owner’s
equity. The balance of assets minus external
liabilities shows the capital or owner’s equity.
5.To help in determining the tax liability.

• Organizations should be paid different types

of tax to the govt. Accounting helps to
determine income tax and other taxes.
 6. To protect the properties
• Accounting helps to protect the property of
an organization from unjustified and
unwanted use and supplying information to
the manager.
 Importance/advantages of Accounting

• The importance and advantages of accounting

are as follows:
1. Complete Record:
Accounting facilitates to replace human
memory by maintaining complete record of
financial transactions. Human memory is
limited by it’s very nature .Accounting helps
to overcome this limitation.
2. Knowledge of result of operation
• Accounting facilitates to ascertain net results
about the profit or loss operation by preparing
Trading a/c, p/l a/c, 0r income statement.
 3. Detection and Reduction of errors and
frauds.
• Accounting facilitates to record all business
transactions scientifically and systematically
which enable to detect errors and frauds and
also take steps to prevent them.
 4. Knowledge of financial position
• Accounting facilitates to show financial
position of the organization by preparing
balance-sheet which is a statement of assets
and liabilities.
 5. Availability of information
• Accounting communicates information to iternal and
external users. The internal users includes all the
organizational participants at all levels of mgmt. Top
level mgmt. requires information for planning, while
middle kevel mgmt. requires information for controlling
the operation. For internal use, information is usually
provided in the firm of reports. External users (Banks,
creditors, Govt. office) do not have direct access to all
the records of an enterprise, they have rely on financial
statement as sources of information.
 6. Help-full in decision making
• Accounting facilitates the users to take
decision by communicating accounting
information to them. Similarly, accounting
helps the mgmt. in planning and controlling
business activities and taking decision for
future.