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SUB-FIELDS OF ACCOUNTING
1. Financial Accounting: It covers the preparation and interpretation of financial statements and communication to the users of accounts. It is historical in nature as it records transactions which had already been occurred. The final step of financial accounting is the preparation of Profit and Loss Account and the Balance Sheet. It primarily helps in determination of the net result for an accounting period and the financial as on a given date.
2. Management Accounting: It is related to internal reporting to the owner and management of a business unit. To discharge the functions of stewardship, planning, control and decision making, the owner and management needs variety of information. The different ways of grouping information and preparing reports as desired by managers for discharging their functions are referred to as management accounting. A very important component of the management accounting is cost accounting which deals with cost ascertainment and cost control.
3. Cost Accounting: The terminology of cost accounting published by the Institute of Cost and Management Accountants of England defines cost accounting is as follows:
"the process of accounting for cost which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs."
4. Social Responsibility Accounting: The demand for social responsibility accounting stems from increasing social awareness about the undesirable by-products of economic activities. As already discussed earlier, social responsibility accounting for social costs incurred by the enterprise and social benefits created.
5. Human Resource Accounting: Human resource accounting is an attempt to identify quantity and report investments made in human resources of an organization that are not presently accounted for under conventional accounting practice.
Role of Accountant in the Society
There are many types of profession in the world which are held in high esteem in public eyes and there is no denying the fact that the accounting profession in one of them. At the core of all types of learned profession, there is the desire of public good and of finding the best way to serve society. By the help of science of accountancy and the spell of its art, a dynamic pattern which assists business in planning its future is cane by accountants out of the inert mass on non-speaking silent figures. This makes their profession an instrument of socio-economic change and welfare of the society.
An accountant with the help of his education, training, analytical mind and experience is best qualified to provide multiple need-based services to the ever growing society. The accountants of these days can do full justice not only to matters relating to taxation, costing, management accounting, financial lay out, company legislation and procedures but they can delve deep into the fields relating to financial policies, budgetary policies and even economic principles. The area of activities which can be undertaken by the accountants is not limited but it can also cover many additional facets.
Functions of Accountant:
1. Maintenance of Accounting Books: An accountant is able to maintain a systematic record of financial transactions entered into during a period and to state the financial position of the concern as at a particular date. For the fulfillment of the twin objective of ascertaining the profit earned or loss suffered and the financial position, it is necessary that all transactions be recorded in a systematic manner, which can be done only by an accountant. Appropriate maintained accounting books assists management in planning, decision making, and controlling functions.
2. Audit: Every limited company is required to appoint a chartered accountant as an auditor who is statutorily required to report every year whether in his opinion the balance sheet shows a true and fair view or the state of affairs on the balance sheet date, and the profit and loss account shows a true and fair view of the profit or loss for the year.
3. Internal Audit: It is a management tool whereby an internal auditor thoroughly examines the accounting transactions and also the system, according to which these have been recorded with a view to ensure the management that the accounts are being properly maintained and the system contains adequate safeguards to check any leakage of revenue or misappropriation of property or assets and the operation have been carried out in conformity with the plans of management.
4. Taxation: An accountant can handle taxation matters of a business or a person and he can represent that business or person before the tax authorities and settle the tax liability under the statute prevailing. He can also assist in avoiding or reducing tax burden by proper planning of tax affairs. Accountant also have social obligation to express their views on broad tax policy, on the effect of tax rate on the economy in general and on all other aspects of taxation in which they have knowledge superior to that of the general public.
5. Consultancy services: Accountant performs an advisory function. He is largely responsible for internal reporting to the management for planning and controlling current operations, decision making on special matters and for formulating long range plans. His job is to collect, analyze, interpret and present all accounting information which is useful to the management. Accountant provides management consultancy services in the areas of management information system, expenditure control and evaluation of appraisal techniques for new investments and disinvestments, working capital management, corporate planning etc.
The practice of accountancy has crossed its usual domain of preparation of financial statements, interpretation of such statements and audit thereof. Accountants are presently taking active role in company laws and other corporate legislation matters, in taxation laws matter and in general management problems. Some of the services rendered by accountants to the society are briefly mentioned as under:BOOK KEEPING
Book keeping is an activity concerned with the recording of financial data relating to business operation in a significant and orderly manner. It covers procedural aspects of accounting work and embraces record keeping function. Obviously book keeping procedures are governed by the end product, the financial statements. The term ‘financial statement’ means profit and loss account and balance sheet. Profit and loss account gives result of economic activities for a period and balance sheet states the financial position at the end of the period. Book keeping also requires suitable classification of transactions and events. This is also determined with reference to the requirement of financial statements. A book keeper may be responsible for keeping all the records of a business or only of a minor segment, such as position of the customers’ accounts in a departmental store. A substantial portion of the book keeper’s work is of a clerical nature and is increasingly being accomplished through the use of mechanical and electronic devices. Accounting is based on a careful and efficient book keeping system.
The essential idea behind maintaining book keeping records is to show correct position regarding each head of income and expenditure. A business may purchase material on credit as well as in cash. When the materials are bought on credit, a record must be kept of the person to whom money is owed. The owner of the business may like to know, from time to time, what amount is due to get details of purchase and to whom. If proper record is not maintained, it is not possible to get details of the transactions in regard to the expenses. At the end of accounting period, the owner wants to know how much profit has been earned or loss has been incurred during the course of the period. For this lot of information is needed. This can be gathered from a proper record of the transactions. Therefore, book keeping, the proper maintenance of books of account in indispensable for any business.
Objectives of book keeping:
1. Complete Recording of Transactions:
2. Ascertainment of Financial Effects on the Business: It is concerned with the combined effect of all the transactions made during the accounting period upon the financial position of the business as a whole.
It is concerned with complete and permanent record of all transactions in a systematic and logical manner to show it financial effect on the business.Inventory
Inventory can be defined as tangible property held for sale in the ordinary course of business, or in the process of production for such sale, or for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery spares. Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories encompass goods purchased and held for resale, for example merchandise purchased by a retailer and held for resale, or land and property held for resale. Inventories also include materials, maintenance supplies, consumables and loose tools awaiting use in the production progress. However, inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular; such as machinery spares are generally accounted for as fixed assets.
The types of inventories are related to the nature of business. The inventories of a trading concern consist primarily of products purchased for resale in their existing form. It may also have an inventory of supplies such as wrapping paper, cartons and stationery. The inventories of manufacturing concern consist of several types on inventories: raw material, parts and factory supplies, work-in-progress and of course, finished products.
Accounting Concepts
Accounting concepts define the assumptions on the basis of which financial statements of a business are prepared. Certain concepts are perceived, assumed and accepted in accounting to provide a unifying structure and internal logic to accounting process. The word concept means idea or notion, which has universal application. Financial transactions are interpreted in the light of the concepts, which govern accounting methods. Now we shall study in detail the various concepts:-
1. Entity Concept: Entity concept states that business enterprise is a separate identity apart from its owner. We should treat organization as distinct from its owner. Business transactions are recorded in the business books of accounts and owner’s transactions in his personal books of accounts. The practice of distinguishing the affairs of the business from the personal affairs of the owners originated only in the early days of the double entry book keeping. This concept helps in keeping business affairs free from the influence of the personal affairs of the owner. This basic concept is applied to all the organizations whether sole proprietorship or partnership or corporate entities.
2. Money Measurement Concept: As per this concept, only those transactions, which can be measured in terms of money, are recorded. Since money is medium of exchange and the standard of economic value, this concept requires that those transactions alone that are capable of being measured in terms of money be only to be recorded in the books of accounts. Transactions, even if, they affect the result of the business materially, are not recorded if they are not convertible in monetary terms. Transactions and events that cannot be expressed in terms of money are not recorded in the business books. For example employees of organization are no doubt, the assets of the organization but their measurement in monetary terms is not possible therefore, not included in the books of account of the organization. Measuring unit for money is taken as the currency of the ruling country.
3. Periodicity Concept: This is also called the concept of definite accounting period. If a concern lasts for 200 years, it is not desirable to measure it performance as well as financial position only at the end of its life. So a small workable fraction of time is chosen out of infinite life cycle of the business entity for measuring performance and looking at the financial position. Generally one year period is taken up for performance measurement and appraisal of financial position. According to this concept accounts should be prepared after every period and not at the end of the life of entity.
4. Matching Concept: In this concept, all expenses matched with the revenue of that period should only be taken into consideration. In the financial statements of the organization if any revenue is recognized then expenses related to that revenue should also be recognized.
5. Going Concern Concept: The financial statements are normally prepared on the assumptions that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed. The valuation of assets of a business entity is dependent on this assumption.
6. Consistency Concept: In order to achieve comparability of the financial statements of an enterprise though time, the accounting polices followed consistently from one period to another; a change in an accounting policy is made only in certain exceptional circumstances. The concept of consistency is applied particularly when alternative methods of accounting are equally acceptable.
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