In this essay we will discuss about:- 1. Definition of Accounting 2. Genesis of Accounting 3. View-Points 4. Functions 5. Principles 6. Concepts.
Essay on the Definition of Accounting:
Accounting is the language of business. Language is a means of communication. Accounting is also communicating the results of business activities to persons involved in the process. Engineers should make sincere efforts to learn about a firm’s accounting practice so that they can better communicate with top management. Accounting studies are concerned with past and current financial events.
Accounting provides the necessary services of a business unit. Accounting is a source of much of the past financial data needed to make estimates of future financial conditions. Accounting is the pivotal source of data for further investigation.
A clear understanding of the origins and meaning of accounting data is needed in order to use or not use those data properly in making forecasting into the future and in comparing actual versus predicted results. This will help in planning future income and expenses.
In 1941 the American Institute of Certified Public Accounts (AICPA) defined accounting as follows: “Accounting is the art of recording, classifying and summarising in significant manner and in terms of money, transactions and events which are, in part, at least of a financial character and interpreting the results thereof”.
In 1966 the American Accounting Association (AAA) defined accounting as follows: “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information”.
Thus accounting may be defined as the process of recording, classifying, summarising, analysing and interpreting the financial transactions and communicating the results thereof to the persons interested in such information.
Genesis of Accounting:
Accounting procedures in use today are the outgrowth of a development that began to take formal shape in the accounts of merchants in Italian city states during Renaissance.
The oldest forms of accounting developed as a result of the needs of commercial firms to keep track of their relationships with outsiders to maintain listings of their assets and to permit an accurate determination of the amounts according to the various parties connected with the conduct of the business. Things have changed fast during the last century.
The growth of industrial organisation has resulted in large scale production, competition and widening of the market. In recent years, changes in technology have also brought a remarkable change in the area of accounting.
Accounting provides a rich source of information to be used as a basis of management actions and decisions. It has come to be recognised as a tool for mastering the various economic problems which a business organisation may have to face.
View-Points on Accounting:
Accounting may be broadly classified into two categories:
(i) Financial Accounting, and
(ii) Management Accounting.
Financial Accounting is designed to serve parties external to operating responsibility of the firm e.g. creditors, investors, employees etc. Thus financial accounting looks to the interests of those who have primarily a financial stake in the organisation affairs.
Management accounting is designed for use in the operational needs of the business i.e. to provide information relating to the conduct of the various aspects of business like costs, funds, profits etc.
Essay on the Functions of Accounting:
The function of accounting is to provide quantitative information, primarily of financial nature about economic entities that is needed to be useful in making economic decisions.
The following are the important functions of accounting:
This is the prime function of accounting. It has assumed importance owing to the limitations of human memory which cannot possibly keep a record of very huge number of daily business transactions in the sequence of their dates, with the consequence that it is supplemented with written records. In the process of recording, the information changes its form as it has to pass through the journal, ledger, worksheets and reports.
This important function consists in ensuring the integrity of information presenting in accounting statements and reports because all users of accounting data want some assurance of their accuracy in the absence of which accounting would fail, to perform its function of providing an informational basis for action. Accounting discharges this function by adherence to certain fundamental truths and uniform enforcement of generally acceptable accounting principles.
Accounting is the language for communicating the financial facts about an enterprise or activity to those who have an interest in using and interpreting them. This function is closely connected with the recording function because the latter loses much of its utility if recorded facts are not available to those who are to use them. The ability of accounting to translate activities involving people, things and even abstract relationships into monetary terms facilitates the communication process.
This is another function of accounting. It helps in unravelling the entire financial story of an undertaking and investing the same with more meaning. Accounting interpretations take the form of the selection of data to be recorded, of classifications made as well as of summary and analytical reports prepared. Thus the term interpretation means explaining the meaning and significance of the data so simplified.
Essay on the Principles of Accounting:
Accounting principles have evolved from years of study and experience. Accountants, teachers, writers, professional societies and many governmental agencies have played influential roles in formulating and improving accounting principles. These principles are based on underlying propositions.
The business enterprise is considered to be a unit or entity separate and apart from its owners. Financial statements summarise the financial affairs of the business entity itself, not of the owners. This separation between ownership and business entity is assumed whether the legal form of entity is a corporation, sole proprietorship or partnership. Sometimes financial statements are prepared for accounting entities that are not recognised legal entities.
Any business is considered a going concern which means that a business is expected to operate indefinitely. The going concern assumption does not necessarily imply perpetual existence. But it does not assume that the business will continue long enough to use up existing assets and to fulfil existing contractual obligations.
The going concern assumption is important in the preparation of financial statements because it frees the accountant from dealing with estimated liquidation values.
The financial occurrences reflected in the statement are considered to be verifiable by objective evidence. This implies that the accountant does not seek to give an unfair or misleading picture of the financial conditions. Evidence of a transaction must be of such a nature that two competent and reasonable men can interpret the facts and reach essentially the same conclusion. Most transactions such as purchases, sales and cash transactions can be verified because they involve written evidence.
4. Cost Concept:
Because of the assumption of objectivity the cost basis of accounting is used. The cost concept holds that the starting point for measuring an assets value is the cost of the assets involved. Generally the cost of an asset is defined as the bargained purchase price arrived at in an arms-length transaction between an independent buyer and seller.
In computing net income for the period, cost expirations are matched against revenues. A cost expiration is then defined as that part of an assets’ cost which should properly be changed against revenue during the period.
To facilitate the comparison of the results of one period with another, the methods of valuing cost and expenses must be consistent. For example if the LIFO method of inventory valuation was used in the preceding period, it must be used in the next period for the results to be comparable. If the methods are changed to meet new conditions, the accountant must call attention to this fact on the statements and indicate the effect of the change on the firm’s income.
6. Stable Unit:
Money is used as a standard measuring unit for reporting financial results. Assets, liabilities and ownerâ€™s equity are expressed in dollar amounts on the assumption that a dollar involved in one transaction has the same importance as another dollar involved at a different time in another transaction. This implies that the dollar has the constant value and a constant meaning, even though the purchasing power of the dollar is continuously changing.
All pertinent financial facts must be fully disclosed either in the financial statements or in the notes accompanying them. The statement reader has a right to presume that no financial facts that might alter his interpretation of the statements are kept from him.
The accountant has traditionally followed a conservative approach in preparing financial statements. Conservation in accounting is properly followed to make sure that all possible risks and uncertainties are carefully considered.
The conservatism with which financial statements have traditionally been prepared probably originated when accounting statements were used primarily by short term creditors who were concerned with financial security behind their credit. The accountant should be conservative in his interpretation of the facts.
Essay on the Concepts of Accounting:
It is difficult to write cogently and clearly about accounting concepts as such. This is mainly because of two reasons. Firstly, in accounting literature proper, principles, postulates and concepts on which accounting theory is based, have been used with such equivocation and free interchangeability that any separate treatment of accounting principles do not seem to be called for, particularly after postulates and principles have been separately dealt with.
Secondly, in actual accounting of any real situation, whether it is theoretical, practical or compositely both theoretical and practical, there is tendency to differentiate between what has been called accounting concepts proper, from the concepts borrowed from sister sciences like economics, information theory of production engineering.
Finally, whatever may be settled upon and a certain amount of arbitrariness in accepting a particular classificatory form appears unavoidable, the overlaps and interdependences between them are so great that it is almost impossible to carry on a meaningful discussion in respect of any single concept or postulate without invoking one or more of the others. In the present text a certain type of, more or less arbitrary distinction has been followed.
The following are the important accounting concepts:
1. Entity Concept:
In its simplest form, it signifies no more or no less than that the accounting records are required to be kept for the entity of the individual firms as distinguished from the owners, creditors or employees or any other parties associated with it.
Nevertheless as in the case of many other apparently simple things, the simplicity of the entity concept is deceptive. Serious disclosures in accounting procedures are found to hold the view that the concept acquires its real relevance only when the separateness is sanctified by the process of attacking a legally recognised existence to a firm through incorporation.
It becomes necessary to consider the entity concept in relation to the fund concept on the one hand and the enterprise concept on the other. It is also necessary to consider the similarities and differences between the entity concept and the enterprise concept as used and developed for the purposes of national accounting. The use of the entity or enterprise concept is absolutely essential for the prevention of getting into that morass.
2. Going Concern Concept:
The next major pure accounting concept that appears in logical order is the ‘going concern concept’. The underlying conceptualisation involves considering the entity as a group concern. Unfortunately this is not a simple concept at all.
What the concept seeks to convey is that the assets and liabilities are not to be attributed values on the assumption that they are to be handled or disposed of separately, but as the basis of their productivity as a whole; in the particular complementary agglomeration in which they have been organised in the particular entity.
On the other hand, the going concern concept does not imply that the entity is to have a perpetual life. In effect the going concern concept has implications rather similar to the economists short run concept, but the emphasis reversed. In other words, the going concern concept places the entity close to the margin of the economists long run concept at the short end.
As is well known, the short run or long run of economics cannot be specified in terms of time periods. They have to be specified in terms of period needed for basic structural and organisational changes.
Circumstances under which an enterprise may not be a going concern:
(i) Circumstances involving liquidity problems and
(ii) Circumstances involving management, customers or operations.
3. Money Measurement Concept:
Accounting records only monetary transactions of all the factors that have influenced the growth of accounting principles and postulates, the process of measurement is possibly the most important one. It is practically the pivot around which the entire accounting function operates. Measurement often involves developing methods by which a particular attribute is quantified.
Although measurement is expressed in monetary terms, the attributes actually measured may be different in nature. The measurement may express the money value in exchange at a given point of time.
It is a known fact that accounting informationâ€™s are made available in monetary terms for the sake of homogeneity, otherwise their classification into ledger accounts and aggregation into comprehensive total would not have been possible.
Measurement of business events in money helps in understanding the state of affairs of the business in a much better way. Transactions which cannot be expressed in money do not find any place in the books of accounts though they may be very useful for the business.