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Accountancy- Introduction

All the organizations accomplish their goals through a group of people who work together for fulfilling the purpose of organization’s existence. In doing their work, organization uses resources - labor, materials, building, equipment, various services etc. These resources need to be financed or paid for.  To perform work effectively, people in an organization needs information and results which they have achieved by using those resources. Also, parties outside the organization need such above information and results, to take their valuable decisions and judgments about the organization. ACCOUNTANCY is the method, process, system, rules and procedure that provide such information to its users. In its simplest terms, Accountancy is what an accountant do i.e.; it is an function performed by an accountant, of portraying a true and fair overall picture of the results or activities carried on by an enterprise during a period and its financial position at the end of the year. It is a practice of recording and classifying, all the events and transactions of an organization that can be characterized in financial terms in a manner which can after interpreting the results thereof provides all the valuable information which might be needed by a stakeholder in taking their decision about the organization.

Accountancy – Meaning

Accountancy is a part of quantitative information which deals with operating information, financial information, management accounting and tax accounting. There are several definitions of accounting. The one developed by an American Accounting Association is that “Accountancy is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” This committee focuses accountancy as an aid to decision making. Accountancy is a part of accounting and accounting is a part of keeping records of all financial events and transactions of an organization say book keeping. It is a primary function which is performed daily through Journal in an organization and also an ultimate function done at the end of the year through preparing financial statements of the organization for the completed period. Thus, we can conclude that accountancy is nothing but the occupation of maintaining and auditing records and preparing financial reports for a business with the help of a professional accountant.

Accountancy – History

Though, accountancy became popular in 20th century; it was practiced almost 7000 yrs back. The earliest accounting records were found amongst the ruins of ancient  Babylon,  Assyria and Sumeria, where the people relied on primitive accounting methods to record the growth of crops and herds to determine if a surplus had been gained after the crops had been harvested or the young animals weaned. But, the modern accounting is based upon the well established principles of double entry system given by an Italian merchant, Luco Pacioli in his book “ De computi set scripturis” in 1494 at Venice, Italy.

Accountancy- As a language

Accountancy is also viewed by many individuals, groups, associations etc. as “ the language of business ” due to its following features :-

i) Firstly, it is a means to provide financial information about a business entity to different groups of people such as auditors, employees, managers, government etc.

ii) As languages are evolved in response to the changing needs of society, and so does accounting. The rules described herein are currently in use, but some of them will probably be modified to meet the changing needs of the organizations and their constituencies.

iii) Every language has to follow some protocol whether it’s Hindi, English or any other language. Similarly, accounting too has its own well established rules which we referred to as accounting standard or principles of accounting.

iv) Apart from above principles, accounting contains some rules wherein few are not definite. Thus, there are differences of opinion among accountants as to how a given event should be reported, just as the grammarians differ on many matters of punctuation, sentence structure and word choices.

v) Finally, the task of learning accountancy is very similar to the task of learning a new language as both of them contains few words which are used in a different sense in the different places.

Accountancy - General Rules

Accountancy is a language of business. To make language convey same meaning to all the people; accountants all over the world developed certain rules, procedures and conventions which are referred as GAAP or Generally Accepted Accounting Principles.  GAAP are common set of accounting rules, principles that organization use while preparing their financial statements so that investors have minimum level of consistency in financial statements they use for various purposes. The first rule of GAAP is that every transaction should be recorded. The businesses that do not record transactions or incorrectly record transactions are committing fraud provided such material misstatement or omission is not an error. The second rule of GAAP is that every transaction is recorded using double entry accounting system i.e. ; for each transaction at least two entries are made where one is debit and other is credit. The third rule is that every transaction is recorded in a log called “General Journal” or simply “Journal”.  

Accountancy – Golden Rules

Since, accountancy is a rugged task and a much wider term too; there are certain rules of accounting which makes it easier to understand. Collectively these rules are termed as Golden Rules. They are:-

i) Debit all expenses and losses, Credit all incomes and gains.

ii) Debit the receiver, Credit the giver.

iii) Debit what comes in, Credit what goes out.

Accountancy – Purpose

a) To ascertain profit and loss of the business by preparing Trading and profit and loss account/ Income statement and financial position of the business by preparing Balance Sheet/ Position Statement after a certain period say calendar year (1st January to 31st December) OR financial year (1st April to 31st March).

b) To have proper control over firm’s property.

c) Provides information required for planning, control, evaluation of performance and decision making.

d) It fulfills the purpose of collecting information on resource usage for trend analysis, auditing, billing, or cost allocation.

So, in order to achieve the purposes, it is necessary to record, classify and summarize business transactions according to a well devised system called (book keeping in elementary stage) and (accounting in advanced stage).

Accountancy – Concepts

a) Business Entity Concept: Irrespective of form of organization, a business unit has got its own individuality as distinguished from person who owns or control it.

b) Money Measurement Concept: Accounting records only those transactions which can be expressed in terms of money. It restricts scope of accounting because it not allows to record transactions which cannot be expressed in terms of money like strike, conflict, inflation due to passage of time, etc

c) Going Concern Concept: A business unit has a reasonable expectation of continuing business at a profit for indefinite period of time.

d) Cost Concept: Assets are recorded in books at price paid to acquire it. But it is also systematically reduced in its value by charging depreciation.

e) Dual Aspect Concept: Every financial transaction involves a two fold aspect i.e. ; yielding of a benefit  And giving of that benefit. Every debit must have its corresponding credit and vice-versa.

f)  Accounting Period Concept: Final account must be prepared on periodic basis rather than waiting till dissolution to know profit or loss and financial position at the end of each period. Normally it is prepared for one year.

g)  Matching Concept: The process of matching the revenue recognized during the period with the  cost to be allocated to the period to obtain the revenue or profit/loss for the year.

i.e. ; Profit = Revenue – Expense

h) Accrual Concept: All transactions are recorded on the basis of year in which it took place disregarding payment made/received or not.

i) Objective Evidence Concept: Entries in accounting records and data reported in financial statements must be based and supported by an objectively determined evidence.

j) Realisation Concept: Revenue is considered to be earned on date when goods are delivered to the customer  i.e. ; only operating gains like actual sale receipts are recorded not the holding gains like holding an asset.

Accountancy – Overview

When a transaction occurs, it is recorded in a document called source document. These source documents are then recorded in a Journal or book of first entry. These Journal entries are then transferred to a Ledger also known as a book of accounts which is a group of several accounts of similar activity. All the accounts of a ledger is closed and the balancing figure is then copied to Trial Balance. Then from the Trial Balance, Financial statements i.e. Income statement, Balance Sheet and Cash Flow Statement are prepared and all the accounts are closed.

NISHANT CHOWDHARY

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