DEFINITION, NATURE, AND SCOPE OF ACCOUNTING

BYANAND PRAKASH

Accounting &

Financial Analysis

Definition

“Accounting is the art of recording, classifying and summarizing in a significant manner, and in terms of money transaction and event which are, in part at least, of a financial character, and interpreting the result thereof.”

{Given by AICPA,in1941}

Definition

“Accounting is a process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of information.”

{Given by AAA, in 1966}

Definition

“Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, and about economic activities, that is intended to be useful in making economic decision.”

{Given by AICPA, IN 1970}

Data

Accounting

Recording of Data

Processing of Data

Communication

Business activity and transaction

Decision making

Function of Accounting

According to Moonitz, the functions of accounting are:To manage the resources held by specific entities;To reflect the claims against the interest in those

entities;To measure the changes in those resources, claims and

interested;To assign the changes to specifiable period of time;To express the above in term of money as a common

denominator.

Characteristic of Accounting

• Accounting involves recording of economic activities which accompany the complexity and uncertainty of business. Therefore, while preparing timely accounting statements, estimates and professional judgment must be made.

• Accounting statements are prepared on:-• Cash basis of accounting• Accrual basis of accounting• Accounting is historical in nature.

Advantages of Accounting

It provides information useful for making economic decisions.

It provide information useful to inventors and creditors for predicting, comparing and evaluating potential cash flows in term of amount, timing and related uncertainty.

It provides factual and interpretative information about transactions and other events which useful for providing, comparing and evaluating the enterprise’s earning power.

Advantages of Accounting

It supplies information useful in judging the manager’s ability to utilize enterprise resources effectively in achieving primary enterprise goals.

Limitation of Accounting

Accounting is historic in nature, it dose not reflect the current financial position or worth of a business.

The profit and loss account tends to match current revenue with historical cost rather than current cost.

Accounting statements do not do not show the impact of inflation.

Accounting principle are not static or unchanging- alternative accounting procedures are often equally acceptable. Therefore, accounting statement do not always present comparable data.

Accounting

Financial Accounting

Financial accounting is the part of which mainly concern with the historical, custodial, stewardship aspect of external reporting to the shareholder, government and other users of accounting information outside the business entity.

Cost Accounting

It is concern with accumulation and assignment of historical costs to unit of product and department, primarily for the purpose of valuation of cost and measurement of profits.

Management Accounting

It is concerned, mainly with internal reporting to the managers f the business unit. It related to planning, control and decision-making which is useful to the management in he discharge of the functions.

Accounting Accounting

Financial Financial Managerial Managerial

External reporting External reporting Interested party Interested party

Income statementBalance sheetCash flow statement

Shareholder

Investor, Creditors

Govt. authority

Managers, Employees

Stock Exchange

Thank You