Chapter 1 Basic Concepts
Meaning of Accounting and Book keeping :
The American Institute of Certified Public Accountants defines Accounting as , “ The art of recording, classifying in a significant manner and in terms of money ,transactions and events which are ,in part at least of a financial character and interpreting results thereof.” As per this definition, accounting is only an art of record keeping. The process of accounting starts by first identifying the events and transactions which are of a financial nature and then be recorded in the books of accounts. According to this definition , accounting ends with interpretation of the results of the financial transactions and events. However, the definition does not reflect the present day accounting function. In the modern business, with diversification of management and ownership, globalization of business and society gaining more interest in the functioning of the organization , the importance of communicating the accounting results has increased and therefore ,requirement of communicating and motivating a informed judgment has also become a part of accounting. Thus, accounting may be defined as the process of recording, classifying ,summarizing ,analyzing and interpreting the financial transactions and communicating the results thereof to the person interested in such information. Book keeping is an art of recording in the books of accounts all those business transanctions that result in the transfer of money or money’s worth.
Branches of Accounting
Financial Accounting Cost Accounting Management Accounting Primarily concerned with record Primarily concerned with Primarily Concerned with Keeping. Directed towards recording of cost data. Supply of information Preparation of P&L A/c and Directed towards acertaining which is useful to the Balance Sheet. Cost per unit of output/activity. Management.
Overview of Financial ,Cost And Management Accounting :
Financial Accounting :
It is the process of identifying, measuring, recording ,classifying ,summarising ,analyzing interpreting and communicating the financial transactions and events. Its purpose is to keep systematic records to ascertain financial performance and financial position and to communicate the accounting information to the interested parties.
Cost Accounting :
It is the process of accounting and controlling the costs of a product, operation or function. Its purpose is to ascertain costs ,control costs and to communicate information for decision making.
Management Accounting :
It is the application of accounting techniques for providing information designed to help all levels of management in planning and controlling the activities of a business enterprise and in decision making. Its purpose is to supply all the information that the management needs in taking decisions and to evaluate the impact of its decisions and actions. Management Accounting is not only confined to the area of cost accounting but also covers areas like Capital Expenditure decisions, Dividend decisions, Capital Structure Decisions.
Principles of Financial Accounting
Various parties , like shareholders ,creditors , investors ,finance institutions etc. are interested in financial or accounting statements of business organization. If there is no uniformity in the principles followed by different concerns in the preparation of financial statements nobody will be in a position to interpret the results and draw conclusions for the same. Not only the users , the auditors would also find it difficult to audit the accounts if they are unaware of the principles followed by their clients while preparing the financial statements. Such statements...
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