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Introduction to Accounting
Over the centuries, accounting has remained confined to the financial record-keeping functions of the accountant. But, today’s rapidly changing business environment has forced the accountants to reassess their roles and functions both within the organisation and the society. The role of an accountant has now shifted from that of a mere recorder of transactions to that of the member providing relevant information to the decision-making team. Broadly speaking, accounting today is much more than just bookkeeping and the preparation of financial reports. Accountants are now capable of working in exciting new growth areas such as: forensic accounting (solving crimes such as computer hacking and the theft of large amounts of money on the internet); ecommerce (designing web-based payment system); financial planning, environmental accounting, etc. This realisation came due to the fact that accounting is capable of providing the kind of information that managers and other interested persons need in order to make better decisions. This aspect of accounting gradually assumed so much importance that it has now been raised to the level of an information system. As an information system, it collects data and communicates economic information about the organisation to a wide variety of users whose decisions and actions are related to its performance. This introductory chapter therefore, deals with the nature, need and scope of accounting in this context.
1.1 Meaning of Accounting
In 1941, The American Institute of Certified Public Accountants (AICPA) had defined accounting as 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 financial character, and interpreting the results thereof’. With greater economic development resulting in changing role of accounting, its scope, became broader. In 1966, the American Accounting Association (AAA) defined accounting as ‘the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information’.
In 1970, the Accounting Principles Board of AICPA also emphasised that the function of accounting is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.
Accounting can therefore be defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of suchinformation. In order to appreciate the exact nature of accounting, we must understand the following relevant aspects of the definition:
• Economic Events
• Identification, Measurement, Recording and Communication
• Interested Users of Information
1.1.1 Economic Events
Business organisations involves economic events. An economic event is known as a happening of consequence to a business organisation which consists of transactions and which are measurable in monetary terms. For example, purchase of machinery, installing and keeping it ready for manufacturing is an event which comprises number of financial transactions such as buying a machine, transportation of machine, site preparation for installation of a machine, expenditure incurred on its installation and trial runs. Thus, accounting identifies bunch of transactions relating to an economic event. If an event involves transactions between an outsider and an organisation, these are known as external events. The following are the examples of such transactions:
• Sale of Reebok shoes to the customers.
• Rendering services to the customers by Videocon Limited.
• Purchase of materials from suppliers.
• Payment of monthly rent to the landlord.
An internal event is an economic event that occurs entirely between the internal wings of an enterprise, e.g., supply of raw material or components by the stores department to the manufacturing department, payment of wages to the employees, etc.
Questions for Practice
1. Define accounting.
2. State what is end product of financial accounting.
3. Enumerate main objectives of accounting.
4. List any five users who have indirect interest in accounting.
5. State the nature of accounting information required by long-term lenders.
6. Who are the external users of information?
7. Enumerate informational needs of management.
8. Give any three examples of revenues.
9. Distinguish between debtors and creditors.
10. ‘Accounting information should be comparable’. Do you agree with this statement. Give two reasons.
11. If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated?
12. “The role of accounting has changed over the period of time”- Do you agree? Explain.
13. Giving examples, explain each of the following accounting terms :
• Fixed assets • Gain • Profit
• Revenue • Expenses • Short-term liability
14. How will you define revenues and expenses?
15. What is the primiary reason for the business students and others to familiarise themselves with the accounting discipline?
1. Explain the factors, which necessitated systematic accounting.
2. Describe the brief history of accounting.
3. Explain the development of and role of accounting.
4. Define accounting and state its objectives.
5. Describe the informational needs of external users.
6. What do you mean by an asset and what are different types of assets?
7. Explain the meaning of gain and profit. Distinguish between these two terms.
8. Explain the qualitative characteristics of accounting information.
9. Describe the role of accounting in the modern world.
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