Accounting All notes NTA UGC NET Paper 2
Accounting is a prerequisite of finance. Finance is a vast subject of study and knowledge of accounting serves as a ground for it. Knowledge and use of accounting information is key factor in any business undertaking. Just as there are various terminologies in medicine, which one has to know to become a doctor, similarly in the field of finance various terminologies are used such as revenue, net profits, cost, expense, operating margin and cash flow. This terminology has clearly defined meaning and often used in business organization.
Accounting is not an end but means to an end. The result of accounting information is the decision that is made after analysis and interpretation of this accounting information. Such information is vital to the owners, management, creditors, governmental regulatory bodies, labour unions or the many other groups that have stake in the financial performance of the company. Accounting is extensively used to illustrate all types of business activity hence it can be suitably called as language of business.
- Recording of business transactions either in journal or subsidiary books
- Classifying business transactions by posting them to ledger accounts
- Closing ledger accounts and preparation of summary of all ledger accounts called trail balance
- Preparation of final accounts viz. trading profit and loss, accounts and balance sheet
During the nineteenth century, the quantum of business transactions increased to great extent and it became clear that the journal was inadequate as the sole book of original entry. In order to save time and efforts and avoid inconvenience of classifying transactions for posting purposes, similar types of transactions are recorded in special journals called subsidiary books. This would facilitate not only the division of journal but it would also make easier the job of posting in the ledger as the postings are done in the form of totals, since they are transactions of similar nature. Various subsidiary books are cashbook, sales book, purchase book, sales returns book, purchases returns book, bills receivable book, bills payable book, journal proper, etc.
Definition of Accounting
From the above discussion, it is clear that over a period of time the concept of accounting and the role of accountants have undergone a revolutionary change. There is no unison regarding exact definition of accounting. Different definitions are drawn by various researchers. However, the central idea of all definitions has been almost the same except the fact that their emphasis has been shifting from one aspect to other.
The American Institute of Certified Public Accountant (AICPA) in 1941, laid the definition of accounting as “Significantly classifying in monetary terms the recording, classifying and summarising money, transactions and events and interpreting the results, they should be at least partly of financial character.”
According to The American Accounting Association (AAA), “Accounting is the method in which identifying, measuring and communicating economic information is done to allow the users to judge and take decisions.”
Thus, accounting may be defined as the process of recording, classifying, summarising, analysing, interpreting the financial transactions and communicating the results thereof to the persons interested in such information.
Need for Accounting
Accounting is often called the speech of business. It serves as means of communication. The information regarding the results of business operations to interested parties in the business viz., the proprietor, creditors, government and other agencies are to be communicated in the form of accounting data. In order to provide correct information it is necessary for the business organisation to record its transactions in clear and systematic maner. A clear and systematic record will serve twin purposes like
- Ascertaining transactions of business to determine profits or loss made during any accounting period.
- Showcase of impact of business transactions on the net worth of the business unit i.e. financial position of the business in terms of assets and liabilities of business as a whole.
Considerable amount of operating information is required to conduct an organisation‟s day-to-day activities, which consist of information about inventory, production, sales cash balance etc. Operating information provides much of the basic data for management accounting, financial accounting and tax accounting.
Financial accounting information is intended by different stakeholders of the business, such as management, employees, financers, government authorities, shareholders etc. In other words, financial accounting is the process of summarising financial data taken from an organisation‟s accounting records and publishing in the form of annual reports for the benefit of people outside the organisation.
Management Accounting: The accounting information specifically prepared to aid managers is known as Management Accounting. This information is used in three managerial functions namely, planning, implementation and control.
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