1
Subject :Accounting for Managers Updated by:Dr. Mahesh Chand Garg
Course Code : CP-104
Lesson No. : 1
FINANCIAL ACCOUNTING : MEANING, NATURE AND ROLE
OF ACCOUNTING
STRUCTURE
1.0 Objective
in
1.1 Introduction
e.
fre
s4
1.2 Origin and Growth of Accounting
e
ot
.n
1.3 Meaning of Accounting
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w
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1.4 Distinction between Book-Keeping and Accounting
s:
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1.5 Distinction between Accounting and Accountancy
1.6 Nature of Accounting
1.7 Objectives of Accounting
1.8 Users of Accounting Information
1.9 Branches of Accounting
1.10 Role of Accounting
1.11 Limitations of Accounting
1.12 Systems of Accounting
1.13 Summary
1.14 Keywords
1.15 Self Assessment Questions
1.16 Suggested Readings
, 2
1.0 OBJECTIVE
After reading this lesson, you should be able to
(a) Define accounting and trace the origin and growth of accounting.
(b) Distinguish between book-keeping and accounting.
(c) Explain the nature and objectives of accounting.
(d) Discuss the branches, role and limitations of accounting.
1.1 INTRODUCTION
in
e.
fre
Accounting has rightly been termed as the language of the business.
e s4
ot
The basic function of a language is to serve as a means of communication
.n
w
w
Accounting also serves this function. It communicates the results of business
//w
s:
operations to various parties who have some stake in the business viz., the
tp
ht
proprietor, creditors, investors, Government and other agencies. Though
accounting is generally associated with business but it is not only business which
makes use of accounting. Persons like housewives, Government and other
individuals also make use of a accounting. For example, a housewife has to keep a
record of the money received and spent by her during a particular period. She can
record her receipts of money on one page of her "household diary" while payments
for different items such as milk, food, clothing, house, education etc. on some
other page or pages of her diary in a chronological order. Such a record will help
her in knowing about :
(i) The sources from which she received cash and the purposes for which it
was utilised.
(ii) Whether her receipts are more than her payments or vice-versa?
(iii) The balance of cash in hand or deficit, if any at the end of a period.
, 3
In case the housewife records her transactions regularly, she can
collect valuable information about the nature of her receipts and payments. For
example, she can find out the total amount spent by her during a period (say a
year) on different items say milk, food, education, entertainment, etc. Similarly
she can find the sources of her receipts such as salary of her husband, rent from
property, cash gifts from her relatives, etc. Thus, at the end of a period (say a
year) she can see for herself about her financial position i.e., what she owns and
what she owes. This will help her in planning her future income and expenses (or
making out a budget) to a great extent.
in
e.
fre
The need for accounting is all the more great for a person who is
es4
ot
running a business. He must know : (i) What he owns? (ii) What he owes? (iii)
.n
w
w
Whether he has earn a profit or suffered a loss on account of running a business?
//w
s:
tp
(iv) What is his financial position i.e. whether he will be in a position to meet all
ht
his commitments in the near future or he is in the process of becoming a bankrupt.
1.2 ORIGIN AND GROWTH OF ACCOUNTING
Accounting is as old as money itself. However, the act of accounting
was not as developed as it is today because in the early stages of civilisation, the
number of transactions to be recorded were so small that each businessman was
able to record and check for himself all his transactions. Accounting was practised
in India twenty three centuries ago as is clear from the book named "Arthashastra"
written by Kautilya, King Chandragupta's minister. This book not only relates to
politics and economics, but also explain the art of proper keeping of accounts.
However, the modern system of accounting based on the principles of double entry
system owes it origin to Luco Pacioli who first published the principles of Double
Entry System in 1494 at Venice in Italy. Thus, the art of accounting has been
practised for centuries but it is only in the late thirties that the study of the subject
'accounting' has been taken up seriously.
, 4
1.3 MEANING OF ACCOUNTING
The main purpose of accounting is to ascertain profit or loss during
a specified period, to show financial condition of the business on a particular
date and to have control over the firm's property. Such accounting records are
required to be maintained to measure the income of the business and communicate
the information so that it may be used by managers, owners and other interested
parties. Accounting is a discipline which records, classifies, summarises and
interprets financial information about the activities of a concern so that intelligent
in
decisions can be made about the concern. The American Institute of Certified
e.
fre
Public Accountants has defined the Financial Accounting as "the art of recording,
e s4
ot
classifying and summarising in as significant manner and in terms of money
.n
w
w
transactions and events which in part, at least of a financial character, and
//w
s:
tp
interpreting the results thereof". American Accounting Association defines
ht
accounting as "the process of identifying, measuring, and communicating economic
information to permit informed judgements and decisions by users of the
information.
From the above the following attributes of accounting emerge :
(i) Recording : It is concerned with the recording of financial transactions in
an orderly manner, soon after their occurrence In the proper books of accounts.
(ii) Classifying : It Is concerned with the systematic analysis of the recorded
data so as to accumulate the transactions of similar type at one place. This function
is performed by maintaining the ledger in which different accounts are opened to
which related transactions are posted.
(iii) Summarising : It is concerned with the preparation and presentation of
the classified data in a manner useful to the users. This function involves the
Subject :Accounting for Managers Updated by:Dr. Mahesh Chand Garg
Course Code : CP-104
Lesson No. : 1
FINANCIAL ACCOUNTING : MEANING, NATURE AND ROLE
OF ACCOUNTING
STRUCTURE
1.0 Objective
in
1.1 Introduction
e.
fre
s4
1.2 Origin and Growth of Accounting
e
ot
.n
1.3 Meaning of Accounting
w
w
//w
1.4 Distinction between Book-Keeping and Accounting
s:
tp
ht
1.5 Distinction between Accounting and Accountancy
1.6 Nature of Accounting
1.7 Objectives of Accounting
1.8 Users of Accounting Information
1.9 Branches of Accounting
1.10 Role of Accounting
1.11 Limitations of Accounting
1.12 Systems of Accounting
1.13 Summary
1.14 Keywords
1.15 Self Assessment Questions
1.16 Suggested Readings
, 2
1.0 OBJECTIVE
After reading this lesson, you should be able to
(a) Define accounting and trace the origin and growth of accounting.
(b) Distinguish between book-keeping and accounting.
(c) Explain the nature and objectives of accounting.
(d) Discuss the branches, role and limitations of accounting.
1.1 INTRODUCTION
in
e.
fre
Accounting has rightly been termed as the language of the business.
e s4
ot
The basic function of a language is to serve as a means of communication
.n
w
w
Accounting also serves this function. It communicates the results of business
//w
s:
operations to various parties who have some stake in the business viz., the
tp
ht
proprietor, creditors, investors, Government and other agencies. Though
accounting is generally associated with business but it is not only business which
makes use of accounting. Persons like housewives, Government and other
individuals also make use of a accounting. For example, a housewife has to keep a
record of the money received and spent by her during a particular period. She can
record her receipts of money on one page of her "household diary" while payments
for different items such as milk, food, clothing, house, education etc. on some
other page or pages of her diary in a chronological order. Such a record will help
her in knowing about :
(i) The sources from which she received cash and the purposes for which it
was utilised.
(ii) Whether her receipts are more than her payments or vice-versa?
(iii) The balance of cash in hand or deficit, if any at the end of a period.
, 3
In case the housewife records her transactions regularly, she can
collect valuable information about the nature of her receipts and payments. For
example, she can find out the total amount spent by her during a period (say a
year) on different items say milk, food, education, entertainment, etc. Similarly
she can find the sources of her receipts such as salary of her husband, rent from
property, cash gifts from her relatives, etc. Thus, at the end of a period (say a
year) she can see for herself about her financial position i.e., what she owns and
what she owes. This will help her in planning her future income and expenses (or
making out a budget) to a great extent.
in
e.
fre
The need for accounting is all the more great for a person who is
es4
ot
running a business. He must know : (i) What he owns? (ii) What he owes? (iii)
.n
w
w
Whether he has earn a profit or suffered a loss on account of running a business?
//w
s:
tp
(iv) What is his financial position i.e. whether he will be in a position to meet all
ht
his commitments in the near future or he is in the process of becoming a bankrupt.
1.2 ORIGIN AND GROWTH OF ACCOUNTING
Accounting is as old as money itself. However, the act of accounting
was not as developed as it is today because in the early stages of civilisation, the
number of transactions to be recorded were so small that each businessman was
able to record and check for himself all his transactions. Accounting was practised
in India twenty three centuries ago as is clear from the book named "Arthashastra"
written by Kautilya, King Chandragupta's minister. This book not only relates to
politics and economics, but also explain the art of proper keeping of accounts.
However, the modern system of accounting based on the principles of double entry
system owes it origin to Luco Pacioli who first published the principles of Double
Entry System in 1494 at Venice in Italy. Thus, the art of accounting has been
practised for centuries but it is only in the late thirties that the study of the subject
'accounting' has been taken up seriously.
, 4
1.3 MEANING OF ACCOUNTING
The main purpose of accounting is to ascertain profit or loss during
a specified period, to show financial condition of the business on a particular
date and to have control over the firm's property. Such accounting records are
required to be maintained to measure the income of the business and communicate
the information so that it may be used by managers, owners and other interested
parties. Accounting is a discipline which records, classifies, summarises and
interprets financial information about the activities of a concern so that intelligent
in
decisions can be made about the concern. The American Institute of Certified
e.
fre
Public Accountants has defined the Financial Accounting as "the art of recording,
e s4
ot
classifying and summarising in as significant manner and in terms of money
.n
w
w
transactions and events which in part, at least of a financial character, and
//w
s:
tp
interpreting the results thereof". American Accounting Association defines
ht
accounting as "the process of identifying, measuring, and communicating economic
information to permit informed judgements and decisions by users of the
information.
From the above the following attributes of accounting emerge :
(i) Recording : It is concerned with the recording of financial transactions in
an orderly manner, soon after their occurrence In the proper books of accounts.
(ii) Classifying : It Is concerned with the systematic analysis of the recorded
data so as to accumulate the transactions of similar type at one place. This function
is performed by maintaining the ledger in which different accounts are opened to
which related transactions are posted.
(iii) Summarising : It is concerned with the preparation and presentation of
the classified data in a manner useful to the users. This function involves the
