Accounting is defined as “the art of recording, classifying and summarizing in terms of money transactions and events of financial character and interpreting the results thereof.” In simplest words, we can say:
(1) Accounting is an art
(2) of recording classifying and summarizing
(3) in terms of money
(4) transactions and events of financial nature and
(5) interpreting the results thereof
Accounting is an art of correctly recording the day to day business transactions: It is a science of keeping the business records in a regular and most systematic manner so as to know the business results with minimum difficulty. Therefore, it is said to be a statistical method for the collection, classification and summarization of financial information.
Objectives of Accounting
The objectives of accounting are two-fold:
(1) To describe permanently, all business transactions, and
(2) To point to the accomplish of each transaction and also the combined execute of all such transactions for a given period so as to salvage out the profit the business has earned or loss incurred, and also to know the fair financial space on a particular date.
The necessity and importance of accounting can be understood by answering the following questions:
(1) How distinguished we have earned this year?
(2) How grand was earned during the last year?
(3) Is our business improving?
(4) How distinguished cash do we have?
(5) How great money we owe?
(6) How remarkable others owe to us?
Accounting Systems
There are various systems of accounting for maintaining business records:
Cash system of accounting
This system records only cash receipts and payments on the assumption that there are no credit transactions. If at all there are any credit transactions, they are not at all recorded until the cash is actually paid or received. Receipts and payments chronicle in case of clubs, societies, hospital, educational institutes, lawyers etc. is the best example of cash system.
Single Entry System
This system ignores the two fold aspect of each transaction as considered in double entry system. Under single entry system, merely personal aspects of transaction i.e. personal accounts are recorded. This blueprint takes no trace of the impersonal aspects of the transactions other than cash. It offers no check on the accuracy of the posting and no safeguard against fraud because it does not provide any check over the recording of cash transactions. Therefore, it is called as “infamous accounting.”
Double Entry System
The double entry system was first evolved by Luca Pacioliin, who was a Franciscan Monk of Italy. With the passage of time, the system has gone through lot of developmental stages. It is the only draw fulfilling all the objectives of systematic accounting. It recognizes the two fold aspect of every business transaction.
These questions are of decisive importance for a trader and the answers can only be derived from up to-date financial records. Only the system of keeping the perfect records of all business transactions will befriend the proprietor to know the amount he has gained or lost.
The main honest of any business is to pick up maximum possible profits with minimum expense. In plan of this, a commercial organization always tries to expand its business, increase its sales and cut operating expenses. The progress made in this regard, is always indicated only by the properly maintained financial records.
Meaning of Accounting
In the beginning, the main unbiased of accounting was to ascertain the result of the business activities (whether profit has been earned or loss has been suffered) during a year and to reveal the financial place of the business as on a particular date. Accounting has to meet the requirements of taxation authorities; investors, government regulations; management and owners. This has resulted in widening the scope of accounting and may be defined as follows:
“Accounting is the art of recording, classifying and summarizing, in a famous manner and in terms of money transactions and events which are in piece at least, of a financial character and interpreting the result thereof.”
Is Accounting a Science or an Art?
In simple words, science establishes relationship of cause and enact whereas the art is the application of knowledge comprising of some approved theories, principles and rules. Since accounting docs not put cause and enact relationship it only provides us with the plan by which objectives of accounting can be achieved, therefore accounting is an art and not a science. Accounting is an art of recording financial transactions in a spot of books; classifying in desired categories and summarizing the information for presentation in a agreeable manner to the concerned persons for their relieve.
Scope of Accounting
The need of a system of accounting was felt by man early in the history of trade and commerce. The art of book-keeping is as worn as the art of trading itself. This art of keeping records passed through many phases since its inception. With the development of commerce, it has attained a station of spacious importance. Indeed, it can be truly said that accounting has become the foundation on which the whole fabric of modem commerce rests.
Though there is no just obligation on an ordinary trader to maintain the records, every business house finds it famous and convenient to hold the systematic records so as to know where exactly it stands. Moreover, it is legally binding on some forms of business, such as joint stock companies, to prepare periodically, statements in first-rate forms showing the space of the business. A helpful and proper device of accounting is an important fraction of any business house for the following reasons :
(1) If no records are kept, it will be difficult to bag out correct obtain profit. Under such circumstances, tax authorities may overestimate the profits and thus a trader will suffer for not having kept the business records.
(2) In absence of superb business records, the trader will gain it difficult to submit the correct area to the court in case he becomes insolvent.
(3) Keeping of beneficial records helps the trader in framing future business plans & policies.
(4) It will be difficult to ascertain and fix the tag of business to be sold or disposed off, if no records are kept.
(5) Finally, in spite of the best memory it is beyond the capacity of a trader to remember all the business dealings with encourage references.