1

MEANING AND SCOPE OF

ACCOUNTING
INTRODUCTION
The necessity of book-keeping and accountancy
arose due to the fact that memory
persons 1s limited and one cannot remember of
various informationsfor ever and
proprietors or owners of business are eager to secondly,the
know the position of the business over
a particular period. Thirdly, book-keeping recordsare alsofinancial
consideredas evidencein theCourts
to prove claims or to defend in case of
claims made against the person concerned regarding
debts, etc. Transactions related to business have
become so important that their proper
recording 5considered aprime requirement of any business and thisrecording of business
transactions is regarded as book-keeping in the field of accounting.
DEVELOPMENT OF ACCOUNTING
[Link], a resident of Venice regarded as the founder of book-keeping.
(Italy), is
His book De Computiset Scripturise'was published in 1494, which is regarded as thefirst book
on book-keeping. Really speaking, it was a book on Arithmetic and book-keeping was described
in its one part only. The advent of industrial revolutionresulted in large-scale production,
competition and broadening of market. In recent years the change in technology hasbrought
about remarkable changes in the field of [Link] has thus led to formulationof various
professional bodies and Institutes in order to monitor, regulate and control accounting
down various
profession at national and international level. The various bodies have laid
and methods at global level for uniformity in
accounting policies, broad guidelines, principles
accounting practices.
MEANING OF ACCOUNTANCY
procedures, principles, concepts, conventions
Accountancy covers those rules, regulations,
the process of accounting. It is a broad term. It also
and techniques which are tobe applied in Tax Accounting and
Accounting, Management Accounting,
includes Financial Accounting, Cost the preparation of books
Accounting. Virtually, accountancy acts as a guide for
Government the results to the concerned
of information and communicating
of accounts, summarisation work of a higher order. In the
words of
usually used for accounting
persons. Accountancy is theory and practice of accounting."
refers to the entire body of the
Kohler, “Accountancy
MEANING OF ACCOUNTING of
refers to the actual process
of business is accounting. Accounting
The language
the accounts. Accounting is based
preparing and presenting work of book-keeping ends.
where the
The work of accounting starts system. Accounting refers
to process of preparing
and
book-keeping of accounts.
on careful and efficient final
manner in the shape
in a scientific and systematic by
presenting the accounts the financial results disclosed
is to analyse and interpret
The main object of accounting
 FINANCIAL ACCOUNTING
2
drawing objective conclusions and communicate
fnalaccounts and financial statement8, of accounting informations, uiz. the
Ba
to the prospective uses Su
relevant required informations agencies,etc. Accountinoie
proprietor, creditors, investors,
banking institutions, Government for any kind CO
and Not-for-Profit organisationsor in fact
useful for profit earning organisations
oforganisation.
areused as synonyms (meaning
In general usage, Accountancy and Accounting more and more
he samething). But, of late, the term Accounting is becoming
popular.
DEFINITIONS OF ACCOUNTING
by different authoritieson the subject.
Accounting has been defined in different ways
is difficult to explain satisfactorily through
Accounting is a comprehensive discipline and it
any singledefinition. However following definitions are given below :
is a means of collecting, summarising,
(1) According to R. N. Anthony, “Accounting
about business."
analysing and reporting in monetary terms, informations
of reporting the results of
(2)According to Smith and Ashburne. *Accounting is a means
economic activities."
may be defined as identifying,
(3) According to Bierman and Derbin, “Accounting
measuring, recording and communicating of financial results.
(1966), “Accounting is the process of
(4) According to American Accounting Association informed
economic informations to permit
1dentifying, measuring and communicating
judgement and decisions by the users of accounts."
Ideal Definition :
Accounting is the process of identifying,
measuring, recording,
the financial
summarising, analysing, interpreting and communicating
classifying, of Trial Balance,
terms. It covers preparation
transactions and events in monetary Balance Sheet. It is
Profit and Loss Account and
Manufacturing Account, Trading Account,
an art as well as a science also.
AND ACCOUNTANCY
RELATIONSHIP BETWEENBOOK-KEEPING,ACCOUNTING
of accounting. Accounting starts where
Book-keeping is the primary (initial) stage
stage of accounting. Accountancy is a
book-keeping ends. Hence, accounting is the secondary
of accounting.
setof fundamental rules of accounting which are applied in the process
books of accounts.
(1)Book-keeping is the systematic maintenance of
and interpretation of accounts.
(2)Accounting is book-keeping plus summarising
(3) Accountancy is book-keeping plus accounting plus communicating accounting
informations to the users.
CHARACTERISTICS OR ELEMENTS OF ACCOUNTING
The following are the characteristics/elements of modern accounting
(1) Recording of economic activities: Accounting involves recording of financial
transactions on the basis of certain specific rúles. The way of recording may differ
in accordance
with the nature and size of business.
in
(2)Re-arrangement of figures : Accounting re-arranges the figures of book-keeping
accordance with the finalaccounts.
(3)Recording of past economic events : Accounting is historical in nature. It is the
recording of past economic events.
(4) Monetary transactions :Accounting records only monetary transactions. Non-monetary
transactions are not calculated in accounting.
(5) Presentation in Summary Form :
Accounting presents the economic events in the
summary form, viz., Manufacturing Account, Trading Account, Profit and LOss Account,
 MEANING AND SCOPE OF ACCOUNTING
te
le Balance Sheet and other financial statements,These
is summary forms represent the financial position of the
concern. ACCOUNTANCY

an
(6)
art
An artof classifying :
the data Accounting is
of classifying the data systematically on the ACCOUNTING
basis of certain rules.
:
(7)Itis a science Accounting is a science because
every business transactionis recorded in a systematic
BOOK-KEEPING
manner. Manners of accounting are fixed and depend
on financial rules'of accounting.
(8) Coverage : Basically
accounting covers profit
earning concerns. But Not-for-Profit earning
institutions (College, Hospital, Schook, Muncipality,
etc.) also come under the umbrella of
accounting.
(9)Usefulness :Accounting provides factualand
interpretative information about transactions and
other events which are useful for predicting,comparing and evaluating theenterprise's earning
power.
:
(10) Analysis of Interpretations On the basis of recorded business events accounting
analyses interpretates the data according to the users of accounting. Future planning and
forecasting are made on the basis of accounting.
NATURE OF ACCOUNTING
The nature of accounting is as follows:
:
(1)Accounting A Profession :In modern days accounting has emerged as a profession in
the field of business concern. Skilled Accountants, Chartered Accountants, Cost Accountants,
etc. are working as professionalsvery successfully.

(2) Accounting : An Intellectual Discipline : Accounting is an organised, theoretical and

practical knowledge based on certain basic principles. It helps us in achieving ourobjective of
of the business.
maintaining proper accounts, i.e., to know the profitability and financial position
:
(3)Accounting A Social Force : Accounting bears the social [Link]
are also useful
informations are useful for the owner of the business but these informations
as
for other sections of the society, viz., creditors, investors, debtors, public and as well
Government.
(4)Accounting:A Policy making Force : Onthe basis and conclusions of the accounting
etc., are formulated. Government also
price policy, business policy, investment policy,
of
formulates export-import policy, industrial policy and production policy on the basis
accounting.
ACCOUNTING :AN ART OR A SCIENCE OR BOTH
enabes us to attain certain
Accounting is an art :Art is that part of knowledge which
it. On the basis of this concept accounting
is
goals and prescribes certain manners to achieve
upon certain rules (manners) to attain the certain
definitelyan art. In fact,Accounting is based
business etc.)
goals (profitability,financial position of
also defines Accounting
The American Institute of Certified Public Accountants
the financial transactions."
as “the art ofrecording, classifying and summarising
Accounting is a Science :
Science is a body of knowledge based on the systematised
principles based on causes and their effects.
The concept of science is universal and verifiable.
because accounting has its own
On the basis of this concept accounting is definitely a science
Its results are based on economic causes.
concepts, principles, rules and assumptions.
 FINANCIAL ACCOUNTING

is an ort and a science both

Accounting
re-arranging
:Accounting is both an art and a
the accounts and records maintained by a book-keeper and preparing
science of

statements based on them and to interprettheir effect on the busines8. financial

SCOPE OF ACCOUNTING bo

fr
Theaction of accounting starts where the work of book-keeping ends. From this point.
view following arethe scope of accounting :
(1)To test and verify the entries in book-keeping.
(2) Totest the total and balances of ledger.
(3) To prepare Trial Balance from the ledger.
(4)To disclose adjustments.
(5) To prepare Final Accounts (Manufacturing Account, Trading Account, Profitand Loss
Account and Balance Sheet).
(6) To rectify errors.

(7)To find out conclusionson the basis of analysis of financialstatements.

ROLE OF ACCOUNTING
At present the role of accounting is as follows:
(1)Language of business : Accounting reflects the positionof business and communicates
the financial results and conclusions to the concerned persons.

(2) Base offinancialjudgement :Accounting provides information forjudging management

ability to utilise financial resources effectively in achieving the goals of the business.

(8) Base of Information System :Accounting covers all the economicevents with results.
Due to this, accounting also communicates the results to interested persons in the form of
quantitative and financialin nature.
(4) Historic Records indicate future : Accounting supplies informations based
on past
economic events, i.e., historical [Link] it is also a universal truth that these records help
in evaluation, predictionor estimation of business for future economic decisions.
OBJECTIVESOF ACCOUNTNG
I. Main objects are : (i) To know profit or
loss of the business. (i) To know the worth of
assets and liabilities of the business at a particular
date. (iii) To know about the progress or
downfall of business. (iv) To know as to what
amount is to be paid to a particular person or
what amount is to be received from a certain person on a
particular date. (v) In the case of the
companies to comply with the provisions of the Companies Act, 1956
as under this Act it is
necessary for the companies to maintain accountin g record.
II. Other Objects :In addition to
the main objects described above, following are
objects :(i) To know about the position of goods other
stocks. (ii) To know the position of cash. (iii)
To know about the errors and frauds
committed by the employees. (iv) To have detailed
information about capitalemployed in the
business. (v)To satisfythe taxation
To know the financial and other authorities. (vi)
requirements of business at a particular time.
In short the object of accounting is
measurement of wealth and financial health.
MODERN FUNCTIONS OF ACCOUNTING
Following are the modern functions of
accounting based on modern
(1) Constructive Functions: approach:
The language of business is
constructivefunctions of accounting accounting. Under the
business transactions and
and converted into finalaccounts, financial events are classified
rectifying the errors and
(2) Recording Functions : detecting the economic frauds.
Under the recording functions of
Manufacturing Account, Trading Account, accounts Trial Balance,
prepared. Profit and Loss Account
and Balance Sheet are
 MEANING AND SCOPE OF
ACCOUNTING
(3)Auditive Functions t
Auditing functions of
books, to check the mandatory nccounting are to testify the
nccounts and audit the final accounts of
frauds. nccounts to find out errors and
f (4)Interpretative
Gnancial statements and
Functions : Interpretative functions of
accounting are to prepare
economic reports. For this Ratio
Fund Flow Statements, etc., are Analysis, Cash Flow
Statement,
prepared.
(5)Informative Functions
informations to users who analyse
: Infornative functionsof accounting
are to provide accounting
them as per their individual
prepared on the basis of final needs. The informations are
accounts and financial
(6) Legal Functions
for the purpose of Income
:
Legal functions of accounting
statements.
cover
Tax authorities and computation of preparation of manadatory accounts
(7) Managerial
Functions
managerial informations on the
: Managerial functions of
basis of financial statements
tax according to the
Income Tax Act.
accounting include preparation of

results for the benefit of

:
(8) Social Function Social
function (responsibility) of
and economic report.
accounting is to disclose financial
investors,creditors and
society as a whole.
SUB-FIELDS OF ACCOUNTING
The sub-fieldsof
accountingare:
(1) Book-keeping :
It covers procedural aspects
record-keeping [Link] also requires of accounting work and
embraces
is also determined
suitable classification oftransactionsand [Link]
with reference to the
requirement of financial statement.
(2) Financial Accounting
statements and communication to
:
It covers the preparation and
interpretation of financial
the users of accounts.
(3) Management Accounting : t
covers the generation of accounting
management [Link] it addresses to a single information for
cost accounting which deals with user-group,the management. lt includes
keeping cost records, measurement of cost of
and cost control methods. product/service

BRANCHES OF ACCOUNTING OR TYPES OF ACCOUNTING

(1) Financial Accounting:An accounting
which relates with the analysis and recording
oftransactions of financialnature, their
classification, the preparation of financial
and their analysis and interpretationis termed as financial statements
accounting.
(2)Management Accounting :
The accounting which is prepared exclusively forthe use of
management is called Management Accounting. Management
prepares plans and budgets on
the basis of this accounting.
According toInstitute ofCost and Management
Accountants, London,“Management
Accounting is the application of the Professional Information in
such a way as toassist the
management in the formation of policies and in the planning and controlof operations of the
undertaking."
(3)Cost Accounting :The accounting which helps in
ascertainment of total cost and cost
per unit of goods and services is called Cost Accounting. It helps in
cost control and cost
reduction.

(4) Tax Accounting

: The accounting which is used for tax purposes is called Tax
Accounting. Income-tax, Sales-tax and other direct and indirecttaxes are calculated on the
basis of this accounting.
(5) Government Accounting: The accounts which are maintained by Central Government,
State Governments and Local Governments are called Government accounts and the
system
of recording is called Government Accounting.
 6 FINANCIAL ACCOUNTING

(6) Hunan :
Resource Accounting Accounting which is exclusively related with huma
resource is called human resource [Link] and values of human resources ar
recorded in this accounting system. It is of immense use fora business enterprise. depart
manage
(7) Social Responsibility Accounting : Social responsibility accounting deals with
identifying, measuring and communicating social activities carried out by the entity for the
T
benefit of various segments of the society.

:
(8)Environment Accounting Aceounting for environment and ecology preservationis a
part of environment accounting. It deals with the accounting of natural resources,pollution concer
is call
1.

and prevention etc.

reven
RELATIONSHIP OF ACCoUNTING WITH OTHER DISCIPLINES

)
Accounting is very other disciplines. In many cases the basic concepts
closely related to cash
of economic laws and mathematics are applicablein accounting also. Hence, the accountant
should have a working knowledge of the relevant provisionsof law and basic concepts of
mathematics, statistics, etc., only then he can play his role

: effectively.

Accounting and Economics Accounting is oriented most closely to economics. It

provides the data base over which the economic models have been developed. Accounting and
trar

is 1

economics both have a similarity in the sense that both seek for optimum utilisation of tra
resources of the firm or the nation. Moreover. the accountants have got the ideas of value of
assets, income,cost, capital, maintenance, etc., from economist, and can convert them suitably ar
eeoraing to their own requirements, practical circumstances and limitations. The
intormations supplied by accountants are used by economists in testing economic theories,
B:

(2)Accounting and Statistics :

resolving decisions in case of alternativeuse of resources and taking economic decisions.
Accounting is a form of statistics whereas statistics is the
science of numbers. In accounting, a number of financial and other ratios are based on
E

statistical methods, which help in averaging them over a period of time. Statistical methods
also help in interpretingthe accounting data. Regression analysisis most useful in accounting,
particularlyfor forecasting,budgeting and cost control, the techniques of standard deviation
and co-efficient ofvariationareused for capital budgeting decisions, the technique of index number
is used for computation of [Link] of an asset in case of price level changes, statistical
a
sampling is used in auditing of data. In fact, accounting serves as statistical function.
(3) Accounting and Management : Management is the art of getting the things done
through [Link] management has to formulate plans for the future and from time totime
exercise various control techniques to determine whether the actual performance is
in
accordance with the budgeted plans. Accounting data helps the management in taking such
[Link] fact, accounting is an essential service function of management.
(4) Accounting and Mathematics: Knowledge of mathematics (basically addition,
subtraction, multiplication and division) is very essential for
accounting computations and
measurements. Calculations of interest, depreciation and annuity are the examples of
such
fundamental uses. Use of computer has als0 enhanced the role of mathematics in
accounting.
(5)Accounting and Law : Operation of accounting processes depends on
business laws.
viz. Indian Contract Act, Sales of Goods Act, Negotiable Instruments Act,
Partnership Act,
Indian Companies Act,Sales Tax Act, Income Tax Act, etc., An economic
entity operates his
accounts within the respective legal framework. Now-a-days
environmental changes in global
business are influencing business law. Due to this business laws are
amending according to
the need of business. So accounting influences law and is
influenced by law too.
(6)Accounting and Engineering : Accounting and
engineering are closely related to each
[Link] the field of manufacturing and
production cost of projects and planning are prepared
on the basis of historical cost, i.e.,accounting. Knowledge of
accounting helps the engineering
 FINANCIAL ACCOUNTING

RELATIONSHIP BETWEEN BOOK-KEEPING AND ACCOUNTING

Accoungbegins where book-keeping ends. Book-keeping is mainly concerned w

recording of financial data relating to business operations in a significant and orderly ma 2. St

It is basically the art of correctly recording in the books of account all those busin
transactions that result in the transfer of money or money's worth. It is mainly clerical 3. P

nature and the nature of work is repetitive. Book-keeping is the first stage of
accounting
process. In fact, Book-keeping is the base of accounting.
4

Accounting is a broader and more analytical subject. It includesthe design of accountine

systems,preparationoffinancial statements, audit, cost studies, income tax work and analysis
5
and interpretation of accounting informationfor internal and external end users as an aid to
making business decisions. This work requires more skill, experience and imagination.
Accounting is the last stage ofaccounting process. According to Anthony, "Accountancy includes
6
Book-keeping."

(A)STRUCTURE OF BOOK-KEEPING
1. CASH BOOK TRANSACTIONS
2. PURCHASES BOOK
3. PURCHASES RETURN

BOOK MEMORANDUM BOOK

4. SALES BOOK
5. SALES RETURN BOOK

6. BILLS RECEIVABLE JOURNAL

BOOK
7. BILLS PAYABLE BOK
8. JOURNAL PROPER LEDGER

(B) STRUCTURE OF ACCOUNTING

TRIAL BALANCE

MANUFACTURING OR PROFIT AND LOSS ACCOUNT

TRADING ACCOUNTS BALANCE SHEET

FINAL ACCOUNTS

|ANALYSIS OF FINAL ACCOUNTS

DIFFERENCE BETWEENBOOK-KEEPING AND ACCOUNTING

Accounting begins where book-keeping ends. Book-keeping and accounting
are
complimentary to each other. Book-keeping differs from accounting on following grounds :

S. Basis of
No. Book-keeping Accounting
Difference
1. Meaning Book-keeping is concerned with the Accounting is concerned with
ofbusiness transactions,
identification summarisation of the classified
measuring them in terms of money, transactions in the form of final
recording inthebooks of original entry accounts,analysing and interpreting
and classifying them in different them and lastly communicate the
accounts. results to the concerned persons.
 8 FINANCIAL ACCOUNTING

RELATIONSHIP BETWEEN BOOK-KEEPINGAND ACCOUNTING

Accountng begins where book-keeping ends, Book-keeping is mainly concerned with
recording of financialdata relating to business operationsin a significant and orderly manner.
It is basically the art of correctly recording in the books of account all those business
transactions that result the transfer of monev or money's worth. It is mainly clerical in
in

nature and the nature of work is repetitive, Book-keeping is the first stage of accounbing
process. In fact, Book-keeping is the base of accounting.

Accounting is a broader and more analvtical includes the design of accounting

subiect. It

studies, income tax work and analysS18

Systems, preparation of financial statements. audit. cost
and external end users as an aid to
and nterpretation of accounting information for internal
experience and imagination.
making business decisions. This work reguires more skill,
to Anthony, "Accountancy ncluaes
Accounting is the last stage of accounting process. According
Book-keeping."

(A)STRUCTURE OF BOOK-KEEPING

1. CASH BOOK TRANSACTIONS

2. PURCHASES BOOK
3. PURCHASES RETURN
BOOK MEMORANDUM BOOK
4. SALES BOOK
5. SALES RETURN BOOK JOURNAL
6. BILLS RECEIVABLE
BOOK
7. BILLSPAYABLE BOK LEDGER
8. JOURNAL PROPER

(B) STRUCTURE OF ACCOUNTING

TRIAL BALANCE

MANUFACTURING OR PROFIT AND LOSS ACCOUNT BALANCE SHEET

TRADING ACCOUNTS

FINAL ACCOUNTS

ANAL YSIS OF FINAL ACCOUNTS

DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING

Accounting begins where book-keeping ends. Book-keeping and accounting are
complimentary to each other. Book-keeping differs from accounting on following grounds :

S. Basis of
Book-keeping Accounting
No. Difference

1 Meaning Book-keeping is concerned with the Accounting is concerned with

identification ofbusiness transactions, summarisation of the classified

measuring them in terms of money, transactions in the form of final

recording in the books of original entry accounts,analysing and interpreting
and classifying them in different them and lastly communicate the
accounts. results to the concerned persons.
 MEANING AND SCOPE OFACCOUNTING

2 Stage It isthe primary stage and basis of Itis the secondary stage of accounting.
accounting. Accounting starts where book-keeping
ends.
3. Posting It is concerned with posting of Journal It is concerned with ehecking of
entries in the Ledgerfronthe books of accuracy of posting.
accounts.

4. Totalling and Itis primarily concerned withtotalling t is concerned with preparation of

Balancing and balancing of various ledger accurate Trial Balance.
accounts.
5. Inclusion of Book-keeping excludes adjustments Accounting includes adjust- ments and
adjustments and rectificationof errors. rectificationoferror.
and rectifica

tion oferrors
6. Results of the It never discloses results of the It shows the net result the business
of

business business. as well as actual position of assets and

liabilities.

7. Principles of Rules of principles, Only the method of interpretation and

accounting,
are followed. reporting to interested persons vary
Accountancy concepts and conventions
from firm to firm.
Accounting has several branches
viz.
8. Branches Book-keepinghas no branch. accounting,
general accounting, cost
management accounting, etc.
the science
9. Art and Science Basically it represents the art aspect. Basically it represents

Aspect aspect.
are recorded after
10. Recording time Transactions are immed- iately Transactions
oftransactions attheend
business recorded. soclassification
of
of the year.
transactions
is to
book-keeping is to The main object of accounting
11. Objective The main object of
or net
records of ascertain net result (netprofit
maintain systematic of
loss) and find out financial position
financial transactions.
the business.

Preparation of Trading, Profit and

and
Trading, Profit
12. Trading, and Preparation of Sheetis not Loss Account and Balance Sheet is
P.
L. Account and Loss Account and Balance included in it.
Balance Sheet book-keeping.
Records regard
ing Adjust
ments & Errors
their
in
rectification The job of accounting is analytical
Job The job of book-keepingis routine and
13. Nature of
nature.
nature.
clerical in
It requires special knowledge and
does not require special knowledge
14. Special know- It
countries ability.
and and ability as in advanced
ledge
workdone by machines. work of
An accountantis liable for the
this is
ability for
15. Liability
A book-keeper is not liable book-keeper.
accountancy work.
ACCOUNTING CYCLE
refers
year. Accounting cycle
cycle is 12 months, i.e., one financial
The period of accounting and summarise the business
procedures used to record, classify
to the sequence of
accounting transactions or economic
with the identificationofbusiness
immediately Trading Account,
[Link] starts Ledger, Trial Balance,
of Journal,
through preparation of financial
statement)
events and passing (with analysis and interpretation
Sheet purpose of
opening entries. The
Balance
Profit & Less Account, reverse
Balance Sheet including
and ends with the Opening
 FINANCIAL ACCOUNTINO

PROFIT
AND LOss
ACCOUNT BALANCE the
SHEET
de
(Close)
TRADING
ACOOUNT fo

ANALYSIS AND
INTERPRETA
TION
Books of original entry
TRIAL BALANCE
BALANCE SHEET 1. Cash Book
(Open)
[Link] Book
3. Purchases Return Book
(TRANSACTIONS 4. Sales Book
5. Sales Return Book
6. Bills Receivable Book
7. Bills Payable Book
8. Journal proper
LEDGER JOURNAL

accounting cycle is toascertain the cumulative effect of [Link] cycle emerges

every year and it is used by all business institutions and Not-for-Profitpublic utilities
undertakings.
ACCOUNTING EQUATIONS
Accounting equation is a statement of equality between thedebit and credit showing that
the assets of a business are always equal to the total liability and capital.
(i) Assets= Liabilities + Capital
(ii) Liabilities = Assets Capital
(iii) Capital Assets Liabilities

(iv) Assets Capital Liabilities =Zero

Accounting equationis also called Balance Sheet Equation,It is true in all cases.
ACCOUNTING PROCESS
The route of accounting to complete the accounting cycle is called accounting process.
The American Accounting Association has stated that, “Accounting is the process of
to permit informed
identifying, measuring and communicating economic information
judgements and decisions by the users of the information." So accounting is a process:
identification,measurement and communication of economic information aredone through five
interrelated important stages :
(1) First Stage : Identification of business transactions : It means determining
what to
The events which have financial
record, i.e., to identify recordable economic events.
be identified. Further, these events
implications and which are relevant for accounting should
should be relevant to a particular business organisation. The business transactions
and
accounting action based on
other economic events are evaluated for appropriate
evidence
materiality of an event supported by documentary evidence. Documentary
means invoices of purchases and sales, credit and debit notes, cash memos, pay-in-slips,
payment vouchers, etc.
:
(2)Second Stage Record ofbusiness transaction :Once the economic events
in an orderly and
are identified
systematic manner in
and measured in financial termns,they are recorded
 MEANING AND SCOPE OF ACCOUNTING 11

the
Journal. For thispurpose the transaction is
analysed to decide which account should be
debited and credited. In casetransactions of a
particular nature are large in number then a
subsidiarybook can be opened. Accounting principles,
policies and procedures should be
followed to reflect the proper treatmentof the
transaction. Now-a-days application of computer
is popular to record business transaction.

:
(3) Third Stage Classification of business tran
classified according to their nature like income,
sactions :
All business transactions are
expense, purchase, sale, assets, liabilities, etc.
This helps in deciding the treatment of transaction in accounting book,
i.e., Account. Classified
account is called Ledger. Record of Journal and other subsidiary books is
inputfor ledger. On
the basis of this record, postings are made in ledger in various
accounts. Each account is
balanced at the end ofa certain period and these balancesare
output of ledger.
(4) Fourth Stage :Summarisation of business transaction :Preparationof Trial Balance,
preparation of Fìnal Accounts with adjustment and rectification errors is the fourth stage
of

of accounting process. Balances from ledger are transferred to Trial [Link] of debit
balances in Trial Balance should be equal to total of credit balancesin Trial Balance. On the
basis of Trial Balance, final accounts are [Link] Accounts refer toTrading Account,
Profit and Loss Account and Balance [Link] Sheet is the summary of whole of the
accountancy or business transactions.
en (5)Fifth Stage : Analysis and interpretation of business transaction:Analysis and
interpretation is the fifth (last) stage of accounting process. Management needs objective
ACCOUNTING PROCESS
Identification of
Documents/Vouchers
business transactions

Record of business
Journal
transactions

Cash Book Subsidiary Book for

credit transactions
Classifiction of
Ledger
business transactions

Summarisation of
Trial Balanceot 1. Purchases Book
business transactions 2. Purchases Return Book
Rectification of errors
3. Sales Book

o dtnts 0 Adjustment entries 4. Sales Return Book

5. Bills Receivable Book

Financial statement
6. Bills Payable Book
Tradin A/c, P/L A/c
Journal Proper
& Balance Sheet
7.

Analysis and interpreation

Analysis and interpreation of Financial statement
of business transactions

Communicationto users of
Object :To take finacial Informations
Accounting
and managerial decision
12 FINANCIAL ACCOUNTING

accounting informations from accounts. For this

purpose various reports like sales report,
purchases report, expenses report, etc., are prepared. In
addition to this Ratio Analysis, Cash
Flow Analysis, Fund Flow Analysis are
prepared for decision-making process, business
forecasting and preparation of future business plans.
Among the above five stages ofprocess of accounting, first three stages are related
to process of book-keeping, fourth stage is related to Financial
Accounting and fifth
stage is related to Management Accounting.
LIMITATIONS OF ACCOUNTING
Accounting has the followinglimitations
[Link] record of non-monetary transactions :The transactions which cannot be expressed
in terms of money are not recorded in accounting,Hence, accounting is limited only upto
monetary transactions.

2. Legal restrictions :In case of companies variousprovisions of the Companies Act, 1956,
are to be complied with and hence certain limitations are imposed by law on accounting system.
u3. No record of changing price level : Cost concept is adopted in accounting. Changing
prices are not [Link] isa very strong limitation of accounting.
informations: Convention of materiality is very important
in
4. No record of immaterial material and immaterial items.
between
accounting. An accountant has to make a distinction item is the
All material items must be disclosed
in financial statements. Hence, material
limitationof accounting. A. S.-1 and A. S.-5 emphasize on this aspect.
profits :In accounting provisionis made
for prospectivelosses
5. No record of prospective profits. This
debts but no provision is made for prospective
like provisionfor bad and doubtful and it is
the concept of conservation
isanother limitation of accounting which is based on
recognised in A. S.-1.
:Accounting policies are framed by the accountant
[Link] application of objectivity factor prevails in
hence it is the subjectivefactor that
according to his own individualjudgement,
ignored.
accounting and objective factor is the
practical limitations and therefore,
In a nutshell, language of business has certain various factors
carefully keeping in mind all
accounting statements should be interpreted
influencing the true picture.
ESSENTIAL/CHARACTERISTICS OF AN IDEAL SYSTEM OF ACCOUNTING
for an ideal system of accounting:
Following are the essentials(characteristics)
principles and rules of accounting.
(i) There should be definite
must be simple and clear.
(ii) Principlesand rules of accounting
upon the need and nature of
(iii) System of accounting must be flexible depending
business.
(iv) System of accounting must
be accurate and complete.
size, type and nature of business.
(v) It must be in accordance with the
so that
(vi) System of accounting must contain
quick rules, conventions and principles
results can be found out at an appropriate time.

INTERACTIONS OF ACCOUNTING INFORMATION

and parts (bodies)of the business (viz.,
Action-reactionbetween accounting information
employees, etc.) is called
management, administration, budget, production, marketing,
aids other part for their effective
interactions of accounting information. This interaction
information analyse
performance and effective decision making. Internal users of accounting
point and try their
and interpret these informations, report each other, control the deviation
level best to achieve the objective of the business.