Definition and scope of accounting
Definition of accounting
Different authorities defined the subject of ‘Accounting’ in different ways. So it is difficult to define the subject through a single definition. Let us look at some of the prominent definitions:
American Accounting Association defined “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” This definition gives importance to the following:
3.Communicating economic information.
American Institute of Certified Public Accountants appointed the Committee on Terminology. They defined “Accounting is the art of recording, classifying and summarizing 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 results thereof.” This definition outlines fully the nature and scope of accounting activity. This is a popular definition.
A business is generally started with capital. Capital is the fund invested by the proprietor. He may also borrow some funds from the banks or other agencies. He uses a part of this amount to get the assets needed for the business. A part of the fund is used for the day to day activities of the business. Numerous transactions will take place every day which are of different kinds. The duty of the accountant is to identify all transactions and record them in the books. Measure them in terms of money. Classify them and record them under different headings. The next step is to prepare a summery in the form of profit and loss account and balance sheet. The he has to communicate the net result to the interested parties in the form of Balance Sheet and profit and loss account. above steps are involved in the accounting.
The scope of Accounting
1. First step is to identify the events and transactions which are of a financial character. With the help of bills and receipts an accountant can identify these transactions.
2. Recording of transactions in the books of account is in terms of money and not in terms of quantities. So, after identifying the events or transaction, it needs to be converted or expressed in terms of money. Most of the transactions are happening in terms of money only. But in some causes, transactions in terms of quantity needs to be converted in terms of money.
3. After identifying and measuring the transaction, it needs to be recored in a book called 'Journal' or one of its sub divisions.
4. Next is grouping or classifying the transactions. Transactions which are of similar nature can be recored in one book. For example rent paid can be recored in a separate book called Ledger. In the ledger a separate account is opened for each items like, rent account, electricity account, salary account, wages account, stationary account etc. Wages paid during the year comes under the heading "Wages Account". This will enable the business owner to find out the total wages paid during the month or year by adding up the wages spent during the month or year.
5. After classifying and posting in different accounts, you will have a good quantity of data available with you. It is difficult to look all the account heads separately to understand the financial position of the business. To make it easy, the accountant will summarize all the data in a meaningful from called profit and loss account. By writing all the expenses on one side and the incomes on the other side. The difference between the totals of income and expenditure is the profit or loss of the business. Another form of expressing the financial status by arranging the assets and liabilities in a table which is known as Balance sheet. From the balance sheet we can understand the financial position of the business. Profit and loss account and Balance Sheet are the summary of all the transactions recorded in the journal and ledger.
6. By using statical tools like averages, ratios, percentages, graphs etc. the results can be analyzed and interpreted. This analyzed data can be reported to the interested parties which is easy to understand without going through thousands of entries made in the journal and ledger. An independent auditor can be employed to do the checking/auditing and making report of the account. Generally a certified Chartered Accounted will do the work of auditing and reporting. This report is very useful for taking decision by the owner or management or by interested parties of the business like bankers, tax authorities etc.