1. Meaning and Definition
Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.
Simple Definition: Accounting is the process of identifying, measuring, recording,
and communicating the required financial information to the interested users.
2. Objectives of Accounting
- To keep systematic records: Recording transactions in Journal and Ledger.
- To determine profit or loss: Preparing Trading and Profit & Loss Account.
- To determine financial position: Preparing Balance Sheet.
- To facilitate management: Providing information for decision making.
- To protect business assets: By maintaining proper records.
3. Advantages of Accounting
- Provides complete and systematic records.
- Calculates profit or loss.
- Depicts financial position of the business.
- Helps in decision making.
- Evidence in legal matters.
- Facilitates raising loans.
4. Limitations of Accounting
- Not fully exact: Based on estimates (e.g., useful life of asset).
- Ignores qualitative elements: Only monetary transactions recorded (e.g., skill of management ignored).
- Ignores price level changes: Assets recorded at historical cost.
- Window dressing: Manipulation of accounts to show better position.
5. Users of Accounting Information
Internal Users: Owners, Management, Employees.
External Users: Investors, Creditors, Banks, Government, Researchers, Public.
6. Book Keeping vs Accounting
| Basis | Book Keeping | Accounting |
|---|---|---|
| Scope | Identifying, measuring, recording, classifying. | Summarizing, interpreting, communicating. |
| Stage | Primary stage. | Secondary stage. |
| Nature of Job | Routine and clerical. | Analytical and dynamic. |