Bookkeeping and accounting

Gr 11

1. BOOK KEEPING, ACCOUNTING & ACCOUNTANCY Jeevan varma 23-05-2021 1

2. Book keeping, accounting, and accountancy 23-05-2021 2 Bookkeeping  means recording all business transactions (e.g., sales, purchases, payments, etc.) in the books of prime entry. It is similar to journaling when you record everything that happened throughout the day, but in a predefined format. While these records are essential for producing financial statements, this part of work is mostly routine and is first to be automated in the accounting department. Accounting  is a broader term, it includes bookkeeping and reporting. Reporting is a more complex process involving analyzing, interpreting and summarizing financial data and presenting the results in the form of a report. The outcome is either financial statements for financial reporting or management reports for management reporting. Accountancy  usually relates to a professional practice, i.e. a consultancy providing accounting services, or the profession itself.

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4. Accounting Meaning Accounting can be defined as a systematic process of identifying , recording , measuring , classifying , verifying , summarizing, interpreting and communicating financial information. Let us see more about the  meaning and roles of accounting  in  business . 23-05-2021 4

5. Historical Functions of Accounting 23-05-2021 5 Recording the financial transactions and maintain a journal to keep them all. It is important to classify and separate the records and the  ledger . Preparation of brief  summary  takes place for quick reviews. This type of accounting gives the net result other than just keeping the records. The preparation of the balance sheet takes place to determine the financial position of the business. The analyzed data and records are then used for other purposes. The last step is to communicate the obtained financial information to the interested sectors, for instance, owners, suppliers,  government , researchers, etc.

6. Managerial Functions of Accounting 23-05-2021 6 Formation of plans in addition to controlling the financial policies. Besides that, a budget is prepared to estimate the total expenditure for future activities. Also, cost control is made possible by comparing the cost with the  efficiency  of the work.  The accounting also provides the necessary information during the evaluation of employee’s performance. To check for fraud and errors is what the workability of the whole procedure depends on.

7. Primary Characteristics of Accounting 23-05-2021 7 Relevance : Relevance in accounting is closely related to the concept of useful information. It means that the information must be capable of making a difference in taking various decisions by the users. The information gathered by users relevant for one purpose may not be necessarily relevant for other purposes. The relevant information also reduces decision-makers uncertainty about future acts. Reliability : Reliable information is required to form judgments about the earning potential and financial position of a business firm. Reliability differs from item to item. There are many factors affecting the reliability of information such as uncertainties inherent in the subject-matter and accounting  measurements .

8. Secondary Characteristics of Accounting- 23-05-2021 8 Comparability : Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other periods, known as an intra-firm comparison or with the accounting information of the other enterprises, known as an inter-firm comparison. Understandability : Understandability means that the information provided through the  financial statements  must be presented in a manner that the users are able to understand it.

9. Objective of Accounting 23-05-2021 9 To keep Systematic Records The main  objective of accounting  is to keep a systematic record of financial transactions which helps the users to understand the day to day transactions in a systematic manner so as to gain knowledge about overall business. To Protect Business Properties Accounting provides  protection  to business properties from unjustified and unwarranted use. Information about the above matters helps the proprietor in assuring that the funds of the business are not necessarily kept idle or underutilized.

10. Objective of Accounting 23-05-2021 10 Ascertain Profit Another objective of accounting is that it helps in ascertaining the net profit earned or loss suffered on account of carrying the business which is done by keeping a proper record of all books of accounts with  respect  to revenues and expenses of a particular period. Ascertain the Financial Position The accounting also helps the businessman to know about his financial position. This objective is served by the Balance Sheet or Position Statement. The  Balance Sheet  is a statement of assets and liabilities of the business on a particular date. It serves as a tool for ascertaining the financial health of the business.

11. Objective of Accounting 23-05-2021 11 Facilitate Decision Making Accounting also helps in the collection, analysis, and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision-making. Information System Another objective of accounting is that it can be defined as accounting functions as an information system for collecting and communicating economic information about the business enterprise. This information helps the management in taking appropriate decisions.

12. Limitations of Accounting 23-05-2021 12 There are some misconceptions about accounting. Like the fact that a  Profit & Loss  Statement shows the true profit or loss earned in a year, or that a balance sheet perfectly depicts the financial position of a  firm . Whereas the truth is that accounting is not a perfect  science  or  art  or language yet. It has been evolving for so many years and continues to evolve. The limitations of accounting must be studied to understand it better.

13. Limitations of Accounting 23-05-2021 13 Measurability One of the biggest limitations of accounting is that it cannot measure things/events that do not have a monetary value. If a certain factor, no matter how important, cannot be expressed in money it finds no place in accounting. Some very important qualities like management, loyalty, reputation, etc find no place on the  balance sheet  or the income statement. No Future Assessment The financial statements show the financial position of the firm on the date of preparation. The users of the statement are more interested in the future of the company in the short term and long term. However, accounting does not make any such estimates.

14. Limitations of Accounting 23-05-2021 14 Historical Costs Accounting often uses historical costs to measure the values. This fails to take into consideration factors such as inflation, price changes, etc. This skews the relevance of such accounting records and information. This is one of the major limitations of accounting. Accounting Policies There is no global standard in accounting policies. In India, we follow the Accounting Standards. Americans follow the GAAP and then there are the international standards, namely the IFRS. And if a global company operates in more than one country, there may be confusion.

15. 23-05-2021 15 Limitations of Accounting Estimates Sometimes in accounting estimation may be required as it is not possible to establish exact amounts. But these estimates will depend on the personal judgment of the  accountant . And estimates are extremely subjective in nature. They are basically a person’s guess of future events. In accounting, there are many cases where such estimates need to be made like provision of doubtful debt, methods of depreciation, etc. Verifiability   An  audit  of the  financial statements  does not guarantee the correctness of such statements. The auditor can only assure that the statements are free from error to the best of his  judgment .

16. 23-05-2021 16 Limitations of Accounting Errors and Frauds Accounting is done by humans, so there will always be the scope of human errors. There is also the fear of possible manipulation of accounts to cover up a fraud. Since fraud is deliberate, it is that much harder to spot. This is one of the most dreaded limitations of accounting.

17. Advantages of Accounting 23-05-2021 17 Maintenance of business records Preparation of financial statements Comparison of results Decision making Evidence in legal matters Provides information to related parties Helps in taxation matters Valuation  of business Replacement of  memory

18. Advantages of Accounting 23-05-2021 18 Maintenance of business records It records all the financial transaction pertaining to the respective year systematically in the books of accounts. It is not possible for management to remember each and every transaction for a long time due to their size and complexities. Preparation of financial statements Financial statements like Trading and profit and loss account,  Balance Sheet  can be prepared easily if there is a proper recording of transactions. Proper recording of all the financial transactions is very important for the preparation of financial statements of the entity.

19. Advantages of Accounting 23-05-2021 19 Comparison of results It facilitates the comparison of the financial results of one year with another year easily. Also, the  management  can analyze the systematic recording of all the financial transactions according to the  policies  of the entity. Decision making Decision making becomes easier for management if there is a proper recording of financial transactions. Accounting information enables management to plan its future activities, make budgets and coordination of various activities in various departments.

20. Advantages of Accounting 23-05-2021 20 Eviden c e in legal matters The proper and systematic records of the financial transactions act as evidence in the court of law. Provides information to related parties It makes the financial information of the organization available to stakeholders like owners, creditors, employees, customers, government etc. easily. Helps in taxation matters Various tax authorities like income  tax , indirect taxes depends on the accounts maintained by the management for settlement of taxation matters.

21. Advantages of Accounting 23-05-2021 21 Valuation of business For proper valuation of an entity’s business accounting information can be utilized. Thus, it helps in measuring the value of the entity by using the accounting information in the case of sale of the entity. Replacement of memory Proper recording of accounting transactions replaces the need to remember transactions.

22. Disadvantages of Accounting 23-05-2021 22 Expresses Accounting information in terms of money Accounting information is based on estimates Accounting information may be biased Recording of Fixed assets at the original cost Manipulation of Accounts Money as a measurement unit changes in value

23. 23-05-2021 23 Disadvantages of Accounting Expresses Accounting information in terms of money Non-financial transactions cannot be given effect to in books of accounts. Only transactions of financial nature are measurable by the accountant. In fact, financial transactions are expressed in terms of money. Accounting information is based on estimates There are some accounting data which are based on estimates. Thus, inaccuracy in estimates is possible.

24. 23-05-2021 24 Disadvantages of Accounting Accounting information may be biased Accountants personal influence affects the accounting information of the entity. Different methods of inventory valuation, depreciation methods, treatment of revenue and capital expenses etc can be adopted by the accountant for measurement of income of the entity. Hence, the income arrived in certain cases might be incorrect due to the lack of objectivity. Recording of Fixed assets at the original cost There can be a difference between the original cost and current replacement cost of a fixed asset due to efflux of time, change in technology etc. Thus, the balance sheet may not show the true financial status of an entity.

25. 23-05-2021 25 Disadvantages of Accounting Manipulation of Accounts The accountant or management can manipulate or misrepresent the profits of an entity. Money as a measurement unit changes in value Stability in the value of money is not possible. Accounting information will not show the true financial position if changes in the price level are not considered.

26. Internal Users 23-05-2021 26 Managerial accounting identifies, measures, analyzes and communicates the financial information needed by management to plan, control, and evaluates a company’s operations for the internal users. Accounting’s goal is to provide necessary information for the management  or also can be defined as Internal users.

27. Internal Users 23-05-2021 27 Internal users are that individual who runs, manages and operates the daily activities of the inside area of an organization. Owners and Stockholders. Directors, Managers, Officers. Internal Departments. Employees Internal Auditor.

28. External Users 23-05-2021 28 External users are those individuals who take interest in the account information of an organization but they are not part of the organization’s administrative process. External users have a direct or indirect interest in accounting information. Financial accounting is the process for the  preparation of financial reports of the enterprise for use by both internal and external parties . These reports are important to the external users of accounting information.

29. External Users 23-05-2021 29 Creditors. Investors. Government. Trading partners. Regulatory agencies. International standardization agencies. Journalists.

30. 23-05-2021 30 Users of Accounting Information

31. 23-05-2021 31 External Users Creditors Creditors or lenders use the accounting information to find out the ability of the borrower to repay the loan, the number of assets and liabilities of the borrower, evidence of income, economic position, etc. before he or she lend the money to the economic entity. Investors Investors are the capital providers of a business. Before investing, an investor sees the financial report for figuring out the possibilities of the business in the future. Financial information is important for an investor for making sure that the investment is secure.

32. 23-05-2021 32 External Users Trading partners Business needs business to do business, it is the truth. Associate trading companies look at the financial information and decide to trade with the particular economic entity. Government Regulatory Agencies The financial information is vital for government regulatory agencies as it allows them to monitor the economy and market.

33. 23-05-2021 33 External Users Lawmakers and economic planners It is important to keep a nation’s economic structure up-to-date with global changes. It is a job for lawmakers and economic planners. The accounting information provides information that is necessary for making changes to the existing laws at the right moment for the economy and society betterment.

34. 23-05-2021 34 External Users Other examples There are other external users for example; labor unions, customers and consumers, suppliers, SEC, tax authority, chamber of commerce, press, competitors, auditors, etc. Anybody outside of the managing radius of an economic entity is interested in the financial information of it, is defined as an external user. For example to that statement; an MBA student looking for financial information on Google, he/she is the external user of the accounting information of Google.

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