Accounting is a very old concept – as old as money. A description of proper keeping of accounts is also found in ‘Arthashastra” written by Kautilya. However, it has developed with the passage of time to meet the requirements and challenges of ever – growing society. The modern-day accounting concept based on double entry system was originated by Luco Pacioli in Italy. Though the act of accounting is very old, in recent times it has acquired special significance because of rapidly growing economy, cut-throat competition, expanding markets and increasing production and changes in technology.
Accounting is used by business entities for keeping records of their monetary or financial transactions. A businessman who has invested money in his business would like to know whether his business is making a profit or incurring a loss, the position of his assets and liabilities and whether his capital in the business has increased or decreased during a particular period.
Definition of Accounting
The Committee on Terminology set up by the American Institute of Certified Public Accountants formulated the following definition of accounting in 1961:
“Accounting is the art of recording, classifying, and summarising 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 result thereof.
As per this definition, accounting is simply an art of record keeping. The process of accounting starts by first identifying the events and transactions which are of financial character and then be recorded in the books of account. This recording is done in Journal or subsidiary books, also known as primary books. Every good record keeping system includes suitable classification of transactions and events as well as their summarisation for ready reference. After the transactions and events are recorded, they are transferred to secondary books i.e. Ledger.
In ledger, transactions and events are classified in terms of income, expense, assets and liabilities according to their characteristics and summarised in profit and loss account and balance sheet.
Thus, accounting may be defined as the process of recording, classifying, summarising, analysing and interpreting the financial transactions and communicating the results thereof to the persons interested in such information.
Steps/Phases of Accounting Cycle
The steps or phases of accounting cycle can be developed as under:
- (i) Recording of Transaction: As soon as a transaction happens it is at first recorded in subsidiary book.
(ii) Journal: The transactions are recorded in Journal chronologically.
- (iii) Ledger: All journals are posted into ledger chronologically and in a classified manner.
- (iv) Trial Balance: After taking all the ledger account closing balances, a Trial Balance is prepared at the end of the period for the preparations of financial statements.
- (v) Adjustment Entries: All the adjustments entries are to be recorded properly and adjusted accordingly before preparing financial statements.
- (vi) Adjusted Trial Balance: An adjusted Trail Balance may also be prepared.
- (vii) Closing Entries: All the nominal accounts are to be closed by the transferring to Trading Account and Profit and Loss Account.
- (viii) Financial Statements: Financial statement can now be easily prepared which will exhibit the true financial position and operating results.
Generating Financial Information
Recording: This is the basic function of accounting. All business transactions of a financial character, as evidenced by some documents such as sales bill, pass book, salary slip etc. are recorded in the books of account. Recording is done in a book called “Journal.” This book may further be divided into several subsidiary books according to the nature and size of the business.
Classifying: Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place so as to put information in compact and usable form. The book containing classified information is called “Ledger”. This book contains on different pages, individual account heads under which, all financial transactions of similar nature are collected. For example, there may be separate account heads for Salaries, Rent, Printing and Stationeries, Advertisement etc. All expenses under these heads, after being recorded in the Journal, will be classified under separate heads in the Ledger. This will help in finding out the total expenditure incurred under each of the above heads.
Evolution of Accounting as A Social Science
Lastly, Social Responsibility Accounting is in the formative process, which aims at accounting for the social cost incurred by business as well as the social benefit, created by it. It emerges from the growing social awareness about the undesirable by-products of economic activities. While earning profit, an enterprise incurs numerous social costs like pollution, using the resources of society like materials, land, labour etc. To compensate for this social cost, in today’s world, an enterprise is expected to generate some social benefits also like employment opportunities, recreation activities, more choice to customers at reasonable price, better quality products etc. Therefore it is demanded that the accounting system should produce a report measuring the social cost incurred and social benefits generated.
Book-keeping is an activity concerned with the recording of financial data relating to business operations in a significant and orderly manner. It covers procedural aspects of accounting work and embraces record keeping function. Obviously, book-keeping procedures are governed by the end product, the financial statements. The term ‘financial statements’ means Profit and Loss Account and Balance Sheet including Schedules and Notes forming part of Accounts. As discussed earlier, Profit and Loss Account gives result of economic activities for a period and Balance Sheet states the financial position at the end of the period.
Book-keeping also requires suitable classification of transactions and events. This is also determined with reference to the requirement of financial statements. A book-keeper may be responsible for keeping all the records of a business or only of a minor segment, such as position of the customers’ accounts in a departmental store. Accounting is based on a careful and efficient book-keeping system.
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- Difference Between AS 14 and Ind AS 103 - all you need to know about
- Difference Between AS 29 and Ind AS 37: all you need to know about
- Difference Between AS 28 and Ind AS 36: Impairment of Assets
- Difference Between AS 26 and Ind AS 38: Intangible Assets
- Difference Between AS 25 and Ind AS 34: Interim Financial Reporting
- Difference Between AS 24 and Ind AS 105: all you need to know about
- Difference Between AS 22 and Ind AS 12: all you need to know about
- Difference Between AS 20 and Ind AS 33: Earnings per Share
- Difference Between AS 19 and Ind AS 17 - Leases
- Difference Between AS 18 and Ind AS 24 - Related Party Disclosures