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Accounting Business

Accounting Business Introduction:

Accounting is often called the language of business. The basic function of any language is to serve as a means of communications. In this context, the purpose of accounting is to communicate or report the results of business operations and its various aspects. Though accounting has been defined in various ways. According to one commonly accepted definition Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof. Another definition which is less restrictive interprets accounting as the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by the users of information.

Scope of Accounting:

Data creation and collection is the area which provides raw material for accounting. The data collected is historic in the sense that it refers to events which have already taken place. Earlier, accounting was largely concerned with what had happened, rather than making any attempt to predict and prepare for future.

After the historic data has been collected, it is recorded in accordance with generally accepted accounting theory. A large number of transactions or events have to be entered in the books of original entry and ledgers in accordance with the classification scheme already decided upon. The recording and processing of information usually accounts for a substantial part of total accounting work. This type of activity of accounting may be called recordative. The processing method employed for recording may be manual, mechanical or electronic. Computers are also used widely in modern business for doing this job.

Data evaluation is evaluation as the most important activity in accounting these days. Evaluation of data includes controlling the activities of business with the help of budgets and standard costs, evaluating the performance of business, analyzing the flow of funds, and analyzing the accounting information for decision making purposes by choosing among alternative courses of action.

The analytical and interpretative work of accounting may be for internal or external uses and may range from snap answers to elaborate reports produced by extensive research. Capital project analysis, financial forecasts, budgetary projections and analysis for reorganization, takeover or merger often lead to research based reports.

Data evaluation has another dimension and this can be known as the auditive work which focuses on verification of transactions as entered in the books of account and authentication of financial statements. This work is done by public professional accountants. However, it has become common these days for even medium sized organizations to engage internal auditors to keep a continuous watch over financial flows and review the operation of the financial system.

Data reporting consists of two parts external and internal. External reporting refers to the communication of financial information about the business to outside parties. Internal reporting is concerned with the communication of results of financial analysis and evaluation to management for decision making purposes.

Emerging role of accounting:

The history of accounting indicates the evolutionary pattern which reflects changing socio-economic conditions and the enlarged purposes to which accounting is applied. In the present context four phases in the evolution of accounting can be distinguished.

Stewardship Accounting:

In earlier times in history, wealthy people employed stewards to manage their property. These stewards rendered an account of their stewardship to their owners periodically. This notion lies at the root of financial reporting even today which essentially involves the orderly recording of business transactions, commonly known as book-keeping. Indeed the accounting concepts and procedures, in use today for systematic recording of business transactions have their origin in the practices employed by merchants in Italy during the 15th century. The Italian method which specifically began to be known as double entry book-keeping was adopted by other European countries during the 19th century. Stewardship accounting, in a sense, is associated with the need of business owners to keep records of their transactions, the property and tools they owned debts they owed, and the debts others owed them.

Financial Accounting:

Financial Accounting dates from the development of large scale business and the advent of Joint Stock Company. This form of business organization permits a limit to the liability of their members to the nominal value of their shares. This means that the liability of a shareholder for the financial debts of the company is limited he had agreed to pay on the shares he bought. He is into liable to make any further contribution in the event of the companys failure or liquidation. As a matter of fact, the law governing the operations of a company in any country gives a legal form to the doctrine of stewardship which requires that information be disclosed to the shareholders in the form of annual income statement and balance sheet.

Cost Accounting:

The industrial revolution of England presented a challenge to the development accounting as a tool of industrial management. Costing techniques were developed as guides to management actions. The increasing awareness on the part of entrepreneurs and industrial managers for using scientific principles of management in the wake of scientific management movement led to the development of cost accounting. Cost accounting is concerned with the application of costing principles, methods and techniques for ascertaining and efficiency of the enterprise.

Management Accounting:

Management Accounting is concerned with the preparation and presentation of accounting and controlling information in a form which assists management in the formulation of policies and in decision making on various matters connected with routine or non-routine operations of business enterprise. It is through the techniques of management accounting that the managers are supplied with information which they need for achieving objectives for which they are accountable. Management accounting has thus shifted the focus of accounting from recording and analyzing financial transactions to using information for decisions affecting the future. In this sense, management accounting has a vital role to play in extending the horizons of modern business. While the reports emanating from financial accounting are subject to the conceptual framework of accounting, internal reports routine or non-routine are free from such constraints.

Social Responsibility Accounting:

Social responsibility accounting is a new phase in the development of accounting and owes its birth to increasing social awareness which has been particularly noticeable over the last two decades or so. Social responsibility accounting widens the scope of accounting by considering the social effects of business decisions, in addition to the economic effects. Several social scientists, statesmen and social workers all over the world have been drawing the attention of their governments and the people in their countries to the dangers posed to environment and ecology by the unbridled industrial growth. The role of business in society is increasingly coming under greater scrutiny. The management is being held responsible not only for efficient conduct of business as expressed in profitability but also for what it contributes to social well being and progress.

Human Resource Accounting:

Human Resource Accounting is a branch of accounting which seeks to report and emphasis the importance of human resources in a companys earning process and total assets. It is concerned with the process of identifying and measuring data about human resources and communicating this information to interested parties.

Inflation Accounting:

Inflation Accounting is concerned with the adjustment in the value of assets and of profit in the light of changes in the price level. In a way it is concerned with the overcoming of limitations that arise in financial statements on account of the cost assumption and the assumption of stable monetary unit.

Accounting as an Information System:

1. Shareholders and investors

2. Creditors

3. Employees

4. Government

5. Management

6. Consumers and others

Role and Activities of an Accountant:

1. An accountant is one who is engaged in accounts keeping.

2. An accountant is a functionary who aids control.

3. An accountant keeps the conscience of an organization.

4. An accountant is a professional whose primary duties are concerned with information management for internal and external use.

5. An accountant is a fiscal adviser.

6. An accountant produces an income statement and a balance sheet for an accounting period and maintains all supporting evidence and classified facts that lead to the final accounting statements.

7. An accountant verifies, authenticates and certifies the accounts of an entity.

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