Accounting is a very old science which aims at keeping records of various transactions. The accounting is considered to be essential for keeping records of all receipts and payments as well as that of the income and expenditures. Accounting can be broadly divided into three categories. Financial Accounting aims at finding out profit or losses of an accounting year as well as the assets and liabilities position, by recording various transactions in a systematic manner. Cost Accounting helps the business to ascertain the cost of production/services offered by the organization and also provides valuable information for taking various decisions and also for cost control and cost reduction. Management Accounting helps the management to conduct the business in a more efficient manner. The scope of management accounting is broader than that of cost accounting. In other words, it can be said that the management accounting can be considered as an extension of cost accounting. Management Accounting utilizes the principles and practices of financial accounting and cost accounting in addition to other modern management techniques for efficient operation of a company. The main thrust in management accounting is towards determining policy and formulating plans to achieve desired objectives of management. Management Accounting makes corporate planning and strategies effective and meaningful. FINANCIAL ACCOUNTING
Financial Accounting aims at finding the results of an accounting year in terms of profits or losses and assets and liabilities. Accounting has been defined as:
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.(AICPA)
A. Business Transactions
B. Classification of Transactions
C. Recording of Transactions
D. Summary of Transactions
Concepts of Financial Accounting (Principles) – GAAP Framework
A. Business Entity
B. Going Concern
C. Monetary Unit
D. Historical Cost
F. Accounting Period
Accounting Cycle: It is essential to describe the accounting cycle in brief. The cycle commences with the happening of a transaction and ends with the preparation of final accounts, i.e. Profit and Loss Account and Balance Sheet.
Utility of Financial Accounting: The utility of financial accounting can be explained in the following manner. A. Financial Accounting provides well defined rules and principles of recording business transactions. This provides uniformity in recording the transactions and thus results of various organizations become comparable. B. For any organization, whether it is profit making or non-profit making, it is essential to find out the results of a particular accounting period, i.e. accounting year. Financial accounting mechanism enables them to prepare Profit and Loss Account and Balance Sheet at the end of the financial year. C. Financial Accounting helps the taxation authorities for determining the tax liability in a fair manner. Income Tax is levied on the profits and financial accounting helps to disclose true and fair view of the business as regards to profits. Thus the assessment of tax liability becomes rational and free from any controversies. D. Financial Accounting is also helpful for the investors who are interested in finding out the profitability of the business in which they want to invest the money. Financial accounting information helps in ascertaining profitability so that decision-making is easier. E. In the course of the business, a firm has to borrow money for various objectives such as expansion, diversification, modernization, and so on. The lenders have to ensure that the money lent by them will be repaid back. For this, they study financial statements i.e Profit and Loss Account and...