ORIGIN OF ACCOUNTING
Accounting has been
in practice from centuries and centuries. It is as old as money itself. ‘Arthashastra’,
the book written by famous economist Kautilya, reveals that accounting has been
in practice in India since about 2300 years. However, the origin of the modern
system of accounting dates back to 1494 when Lucas Pacioli of Italy first published, the Principles of Double
Entry System'.
DEVELOPMENT OF ACCOUNTING
Accounting has been
taken seriously from the late thirties although it was in use earlier also. In
recent years, the importance of accounting has increased manifold due to large
scale production and cut throat-competition. In the words of Gordon and Gordon, "It has come to be recognised as a
tool for mastering various economic problems which a business organization may
have to face."
Many important
developments have taken place in accounting and various boards like AICPA, (American
Institute of Certified Public Accountants), AAA (American Accounting
Association), ICAI (Institute of Chartered Accountants of India) have been
formed. The advent of Joint-stock companies, where accounting and auditing has been
made compulsory, gave a further boost to accounting. Today, accounting has
become a need of every businessman, small or large, rural or urban, trade or
industry.
MEANING AND DEFINITION OF ACCOUNTING
Accounting is the
language that a business enterprise use to communicate with others about its
working results and progress. The basic purpose of accounting is to ascertain the
profit or loss of business and also to know the financial position of a business.
Accounting information helps management to take important decisions regarding
business and chalking out future policies.
To make the meaning
of accounting more clear, let us study the following definitions of accounting:
“Accounting is the science of recording, classifying,
summarizing the business transation in a significant manner and in terms of
money. It is an art of analyzing and interpretation of business transation and
communicate the result to the concern parties.”
"Accounting is the art of recording, classifying
and summarizing in a significant manner and in terms of money transactions and
events which in part, at least of a financial character and interpreting
results thereof."
American
Institute of Certified Public Accountants (AICPA),
"Accounting
is the process of communicating economic information identifying, measuring and
information." to permit informed judgements and decisions by the users of
information.”
American
Accounting Association (AAA),
CHARACTERISTICS OF ACCOUNTING
Following are the
main characteristics of accounting
- Accounting
is a science of recording financial transactions.
- It
helps in ascertaining financial results.
- Accounting
communicate various information to management to take an important decision.
- Accounting
helps in measuring business events in terms of money.
- It
helps in interpreting the results of a business.
- Accounting
is a science as well as an art.
- It
is an art of analyzing and interpretation of business transactions.
NATURE OF ACCOUNTING
Accounting as a Science and
as an Art:
Meaning of Science: Science is a systematic body of knowledge which establishes a relationship between causes and effects. It is a systematic collection, classification and analysis of Facts.
Thus, the following are
the essentials of science
(i) A systematic
study of facts, (ii) certain rules and principles, (iii) rules and principles
of science are based on causes and effects and (iv) rules and principles of
science is universally applicable.
Is Accounting a Science Arguments in Favour:
i.
Like
science accounting involves the collection, classification and analysis of data
of monetary transactions.
ii.
Like
science, accounting is based on certain rules and principles.
iii.
Like
science, accounting establishes a relationship between causes and effects of
economic events.
iv.
Like
science, rules and principles & accounting are universal. These rules and
principles apply in almost all countries circumstances.
Is Accounting A Science Arguments Against:
i.
Rules
and principles of accounting are not as static as those of science. Rules and
principles of accounting keep on changing from time to time.
ii.
Accountants
may manipulate the rules and principles of accounting because they are free to
use these rules and principles according to their requirements.
iii.
There
are wide differences among accountants on the application of accounting rules and
principles.
Conclusion: Above
discussion mates it clear that accounting is certainly a science. The rules and principles of accounting are
not as static and universal as those of science. Accounting is basically a
social science and its subject matter is the recording and analysis of the business
transaction.
Meaning of Art: Art means the systematic branch of knowledge which teaches how to do a
particular work in its best manner. Art is the practical application of
scientific principles. Science lays down certain principles while art puts
these principles into practical use.
Arguments in Favour:
i.
Accounting
explains how the business transactions should be recorded in books of accounts
and how they should be analyzed.
ii.
Accounting
helps in the comparative study of financial results.
iii.
Conclusions
drawn in the accounting process are important in the solution of business problems.
iv.
Artistic
view of accounting does not weaken its scientific view.
Arguments in Against:
i.
Accounting
is related to recording, classifying and analyzing financial business
transactions. Accounting is no how concerned with decision making and policymaking.
ii.
Nature
and scope of accounting and art are quite different from each other.
Conclusion: Above
discussion makes it clear that accounting is an art as well. Science and art
are complementary to each other and not competitive. Every theoretical
knowledge requires practical application also. From this point of view,
artistic view of accounting cannot be denied.
NEED FOR ACCOUNTING
A large number of
transactions take place in every business in day-to-day activities such as
sales, purchases, expenses, incomes, receipts, payments etc.
It is not possible
for a businessman to memorize each and every transaction of business as they
are innumerable. A businessman gives cash/makes payments and receives payments
on a day-to-day basis. He cannot remember all the varied transactions taking
place in business daily. Accounting helps in the following ways:
i.
All
financial transaction are recorded in a systematic manner in the books of account so that there is no need to rely on memory. Hence memory is limited and its
very nature.
ii.
It needs to maintain proper books of account.
iii.
Financial
accounting needs to maintain systematic business records and it enables the accountant
to compare the profit of one year with earlier year to know the significant
change.
iv.
It
can be produced in the court of law as evidence in case of dispute
LIMITATIONS OF ACCOUNTING
Though accounting provides a lot of information to various people, yet it is not free from limitations.Important limitations of accounting are as under:
1.
Ignores Qualitative Aspects: In accounting, only those
transactions are recorded which are expressed in terms of money. Qualitative
aspects such as the skill of manager, customer's tastes and preferences,
changes in government policy, changes in the state of competition etc, are not recorded
in accounts. It records only quantitative transactions and ignores the qualitative
aspects of these transactions.
2.
Possibility of Manipulation: In accounting, interpretation and
results may be based on the personal bias of an accountant. He can manipulate
accounts by charging more depreciation, creating excess provision etc. It may
be manipulated to show a more favourable position or even less income.
3.
Showing Valueless Assets: In accounting, certain valueless
assets such as the discount on issue of shares and debentures, preliminary
expenses, deferred revenue expenditure etc, are shown in the balance sheet.
4.
Based on Historical Cost: Accounts are prepared on the basis
of historical costs. It does not take into consideration the effect of price
level changes. Decisions based on such figures may not be correct and these may
mislead the user also.
USERS OF ACCOUNTING INFORMATION
Accounting is a
means of communicating the results and progress of business to them. Various
persons inside and outside the business are as follows are interested in accounting
information. Users of accounting information:
1.
Owners: Owners are the persons who have
invested their money in the business. They need accounting information to know
the profitability and financial position of the business in which their money
is invested. They are also interested in knowing the safety, liquidity and
profitability of their funds and future prospects of a business. Accounting
provides all this information to them.
2.
Management: Management is responsible for
planning, organizing, decision making, and controlling. Accounting provides a
lot of information to management and helps in the decision-making process. It helps
the management in planning and controlling function. It also helps the
management in finding the weak points and deviations of business so that necessary
remedial measures may be taken. It helps in fixing the quotation price/selling
price also.
3.
Employees: Employees are interested in knowing
the profitability of the business as they would like to claim higher salaries,
higher bonus and better perquisites. In an unsound organization/business,
employees do not want to work, therefore, they use accounting information to
assess the profitability and future prospects of the business.
External Users:
External users are the persons which are outside the government etc. organization
like investors, buyers, creditors,
1.
Investors and Potential Investors: Investors are interested in knowing
the safety of their funds and potential investors want to make decisions
whether to invest in the business or not. They want to know the financial
position and profitability of the business and, thus, accounting serves their
purpose.
2. Creditors and Financial Institutions: Creditors would like to know whether
their money is safe and whether they would get creditworthiness of their money
back in due time or not. They want to be satisfied with the enterprise.
Financial institutions have to decide whether to accept a loan proposal of an
enterprise or not.
For this
purpose, they need complete information of financial soundness and
profitability of the business enterprise. Financial statements help in the study
help in assessing the financial capability of a business.
3.
Government and other Agencies: Government is interested in the
financial statements of business for the assessment of tax liability such as
income tax, sales tax, service tax, customs duty, excise duty, VAT etc. It needs
accounting information for compiling statistics for the ascertainment of
national income, national product, rate of savings and capital formation also.
Other agencies also need to know the financial position of business
enterprises.
4.
Consumers and General Public: Consumers are interested in
accounting information as they want to know whether the price they are paying
for goods and services purchased by them, is fair or not. General public is
interested in accounting because successful business enterprises provide more
employment opportunities and contribute to the development of the economy.
5.
Researchers: Accounting is of universe use to
researchers. It helps in providing useful information to researchers like
sales, purchases, profit and loss, fixed assets, current assets, current
liabilities etc.
Objective of Accounting
The main objectives
of accounting are as follows:
1.
To Keep Systematic Record of Business
Transactions:
Accounting aims at recording all financial or economic transactions in the
books of accounts systematically. This is quite important as we can not remember
all transactions in mind. For this purpose, all business transactions are first
of all recorded in Journal or Subsidiary Books and then posted into the ledger.
2.
To Disclose Operational Results: Accounting helps in calculating the
net profit earned or loss suffered on account of carrying the business. This is
done by keeping a proper and complete record of incomes and expenses of a
particular period. For this purpose, Trading and Profit & Loss Account of
the organization is prepared at the end of each accounting period.
3.
To Provide Knowledge about Financial
Position: To find
out the financial position of the business is also the main objective of
Accounting. While summarizing the accounting data a financial positional
statement is prepared. It is named as "Balance Sheet". A Balance
Sheet is actually a mirror of the financial position of the business. It is
also said to be a barometer for ascertaining the financial health of the
business.
4.
To Provide Information to Various
Persons: Accounting
is of primary importance to the proprietors and the managers. However, other
persons such as creditors, prospective investors, employees, lender or
Government etc. are also interested in the accounting information. Accounting
these days has taken upon itself the task of collection, analysis and reporting
of information to various users in order to facilitate rational
decision-making.
5.
To Meet Legal requirements: Accounting system helps the
proprietors or the management in fulfilling various legal requirements, such as
income tax or sales tax returns etc. It also helps in contesting the court
cases.
6.
Control Over Employees: Scientific and logical accounting
system can detect frauds and errors easily leading to effective control over
malpractices of employees.
