Subject: Financial Accounting-I
Course Code: BBA-104
Author: Dr. Chandra Shekhar
INTRODUCTION TO ACCOUNTING
Development of accounting discipline
An accountant s job profile: functions of accounting
Utility of accounting
Types of accounting
1.5.1 Financial accounting
1.5.2 Management accounting
1.5.3 Cost accounting
Self assessment questions
After going through this lesson, you will be able to·
Understand the meaning and nature of accounting.
Differentiate between various types of accounting.
Know development of accounting principle.
Explain the importance of accounting.
Accounting is a system meant for measuring business activities,
processing of information into reports and making the findings available to decision-makers. The documents, which communicate these findings about the performance of an organisation in monetary terms, are called financial statements.
Usually, accounting is understood as the Language of Business. However, a business may have a lot of aspects which may not be of financial nature. As such, a better way to understand accounting could be to call it The Language of Financial Decisions. The better the understanding of the language, the better is the management of financial aspects of living. Many aspects of our lives are based on accounting, personal financial planning, investments, income-tax, loans, etc. We have different roles to perform in life-the role of a student, of a family head, of a manager, of an investor, etc. The knowledge of accounting is an added advantage in performing different roles. However, we shall limit our scope of discussion to a business organisation and the various financial aspects of such an organisation.
When we focus our thoughts on a business organisation, many
questions (is our business profitable, should a new product line be introduced, are the sales sufficient, etc.) strike our mind. To answer questions of such nature, we need to have information generated through the accounting process. The people who take policy decisions and frame business plans use such information.
All business organisations work in an ever-changing dynamic
environment. Any new programme of the organisation or of its competitor will affect the business. Accounting serves as an effective tool for measuring the financial pulse rate of the company. It is a continuous
cycle of measurement of results and reporting of results to decisionmakers. Just like arithmetic is a procedural element of mathematics, book keeping is the procedural element of accounting. Figure 1 shows how an accounting system operates in business and how the flow of information occurs.
People make decision
Business transactions occur
reports to show the results
of business operations
FIG 1: THE ACCOUNTING SYSTEM
Source: Liorngren, Harrison and Robinson, Financial and Management Accounting, Prentice Hall, New Jersey, 1994.
DEVELOPMENT OF ACCOUNTING DISCIPLINE
The history of accounting can be traced back to ancient times.
According to some beliefs, the very art of writing originated in order to record accounting information. Though this may seem to be an exaggeration, but there is no denying the fact that accounting has a long history. Accounting records can be traced back to the ancient civilizations of China, Babylonia, Greece and Egypt. Accounting was used to keep records regarding the cost of labour and materials used in building great structures like the Pyramids.
During 1400s, accounting grew further because the needs for
information of merchants in the Venis City of Italy increased. The first known description of...
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