Meaning and scope of accounting

Here are some basics of accounting like its definition, steps involved in it, book-keeping, objectives of accounting, functions and limitations of accounting for the beginners.
It is been tried to explain all these things in a quite easy manner.
Hope that it matches what you were looking for.

1. MEANING AND SCOPE OF ACCOUNTING

2. 1. ACCOUNTING Accounting is an art of identifying, recording, classifying, summarizing the transactions which are of financial nature then analyzing, interpreting, and communicating the results there of. It’s also called as ‘language of business.’

3. 2. STEPS INVOLVED IN ACCOUNTING Some Steps in accounting are as follows: (i) Identification of financial transactions (ii) Recording (iii) Classifying (iv) Summarizing (v) Analyzing (vi) Interpreting (vii) Communicating

4. 2. Steps in Accounting: Explanation (i) Identification: Before anything, first step of accounting is to identify whether the transaction is of financial nature or not. It means, only those transactions which can be measured in terms of money are further recorded in books. (ii) Recording: This is a basic function of accounting. All the financial transactions are now recorded in books of accounts i.e. journal books like purchase book, sales book, purchase return book, sales return book, etc.

5. 2. Steps in Accounting: Explanation (iii) Classifying: It is concerned with the systematic analysis of the recorded data. Here, the transactions which are of same nature are put at one place in a small and easy to carry manner. This book containing classified information is called a ledger . Example: Salaries to different employees are paid on different different dates and are recorded in journal book at different places also but now we want to know the total amount of salaries paid till date so for easy access to this information, salaries account (ledger A/C) is prepared.

6. 2. steps in accounting: Explanation (iv) Summarizing: Here, data is presented in such a manner that is useful to internal as well as external users of financial statements. This process leads to preparation of financial statements : (a) Trial Balance (b) Profit and Loss Account (c) Balance Sheet (d) Cash Flow Statement

7. 2. Steps in accounting: Explanation (v) Analyzing: It means methodical classification of the data given in financial statements. These figures in financial statements are to be in a simplified form. Eg: All current assets at one place and all fixed assets at one place. (vi) Interpreting: It is simply concerned with explaining the meaning and significance of the relationship as established by the analysis of accounting data which helps in decision-making about financial condition and profitability of the business.

8. 2. Steps in accounting: Explanation (vii) Communicating: It is concerned with revealing the accounting information presented in financial statements to the different stakeholders of the business that will help them in making rational decisions then.

9. 3. DIFFERENCE BETWEEN A TRANSACTION AND EVENT TRANSACTION Transaction simply refers to performance of an act in a business. Example: Sale of goods. EVENT Event refers to the result of all the transactions. Example: Closing stock

10. 4. BOOK KEEPING Book keeping is an activity concerned with the recording of financial data relating to business operations in a significant and orderly manner. It is basically concerned with: Identification of financial transaction Measuring their monetary value Recording Classifying

11. DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING BOOK-KEEPING It includes identification, measurement of financial transactions in terms of money, recording and classifying It is a primary stage. It is clerical in nature. There is no decision making. ACCOUNTING It in addition to book-keeping includes summarizing transactions, analyzing, interpreting and communicating results . It is a secondary stage. It starts where book-keeping ends. It is analytic in nature. It further leads in decision making.

12. 5 . OBJECTIVES OF ACCOUNTING Recording of Transactions: Basic objective of accounting is to systematically record the financial aspects of business transactions i.e. book keeping. These recorded transactions are later on classified and summarized logically for preparation of financial statements for analysis and interpretation. Ascertaining result of financial transactions: Profit and loss A/C is prepared by accountant to know the result of business operations for a particular period of time. It is ascertained whether the business is profitably or under loss.

13. 5. OBJECTIVES OF ACCOUNTING Ascertaining Financial Position of Business: Businessman is not only interested in knowing the result of business(Profit and Loss) but also wants to know the financial position of business i.e. how much he owes to someone (liability) and how much he owns (assets). For this purpose, Balance Sheet is prepared that helps in ascertaining financial health of business. Communicating the Financial Results to Different Users: Accounting as a language of business communicates the financial results to various stakeholders as per their needs.

14. 6. FUNCTIONS OF ACCOUNTING Measurement: Accounting measures past performances of the business and depicts its current financial position. Decision making: Accounting provides the needed information be stakeholders to them and help in rational decision making. Control: Accounting helps in making analysis and decision making in order to have a better control on various aspects of a business. Forecasting: Accounting helps in forecasting future performances and financial position using past data and current working of business.

15. 7. LIMITATIONS OF ACCOUNTING Non-Financial Transactions: Accounting only record those transactions which are of financial nature and do not record non-monetary transactions even when they are of great importance to business and affect it. Example: Inflation. Dynamic business Environment: Today’s business environment is extremely dynamic so it is very difficult to maintain accounts in this fast changing business environment.

16. 7. LIMITATION OS ACCOUNTING Personal Judgment: Accountant has to exercise their personal judgment in respect of various items. For Example: It is difficult to ascertain the actual useful life of an asset which is needed while calculating depreciation. Here, different persons give different opinions which results in ascertainment of different figures of profit or loss.

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