Chapter 1 Scope And Meaning Of Accounting

Topics: Balance sheet, Asset, Bookkeeping Pages: 22 (8072 words) Published: June 17, 2015
CHAPTER

1
Scope and Meaning
of Accounting

ˆ

Introduction

ˆ

Need and Role of Accounting

ˆ

Meaning of Book
-keeping and Accountancy
Book-keeping

ˆ

Accounting — Science or Art

ˆ

Definition and Explanation of Accounting

ˆ

Users of Accounting

ˆ

Scope/Branches of Accounting
z

Financial Accounting

z

Cost Accounting

z

Management Accounting

ˆ

Systems of Accounting

ˆ

Objectives/Advantages of Accounting

ˆ

Limitations

ˆ

Terminology often used — Some Basic TTerms
erms

ˆ

Check Y
our Understanding
Your

ˆ

Pick up the Most Appropriate

ˆ

Recall your Memory

ˆ

Objective Questions

ˆ

Interview Questions

Accounting for Managers

2

1.1 INTRODUCTION
Accounting is an ancient art, as old as money itself. In the beginning, accounting has been elementary. The modern system of accounting owes its origin to Pacoili who lived in Italy in 18th Century. Pacioli codified rather than invented the system of accounting and he is widely regarded as the “Father of Accounting”. Even in our country, Chanakya has clearly indicated the need of Accounting and Auditing in his book “Arthashastra”. The Indian system of accounting is as scientific and systematic as the one developed in the West. We do not lag behind the West in the origin and development of accounting.

1.2 NEED AND ROLE OF ACCOUNTING
Many consider accounting has a role to play only in business and not in domestic life. This is not, factually, correct. In fact, we see the beginning of accounting in every wise housewife. In case, a housewife records her domestic transactions, connected with money, regularly, she can collect a lot of valuable information. Many intelligent housewives, though not literate, maintain a small dairy to record receipts on one page and all payments on the other page. Receipts are not always many, either in the form of income of the husband, her supplementary earnings, gifts from relations etc. List of payments is relatively more on different items say milk, education, entertainment, food, and clothing and, finally, planned commitments on savings etc. She can conveniently find out how much she has spent on the different items of expenditure, at the end of the month. This exercise helps her in planning her expenditure as income is, often, beyond her control. The family, not she alone, can learn useful lessons, when they review, where they have gone wrong in estimating or not controlling their spending. It would, equally, facilitate the family to plan and achieve their dreams, together, be it owning a home, car to drive, long term goals of children’s education, retirement life and many more things, they wish to achieve. Yes, the need of Accounting is more for business.

Accounting is the language of business.

The main purpose of language is communication of ideas. Similar is the purpose and role of accounts for a business is. A businessman has to keep a systematic record of the financial activities of his firm so that he can know the financial position. What it owns are assets and what it owes are the liabilities. It is necessary for every businessman to know where he stands in many respects:

(i) What he owns?
(ii) What he owes?
(iii) Whether he has earned profit or suffered loss over a period? (iv) What is his financial position? Is he better off or moving towards bankruptcy? Only accounts give answers to these questions.

Scope and Meaning of Accounting

3

Currently, the form of business has been joint stock company, in many growing areas, these days. By law, these firms have to keep the books of accounts to meet the requirements of Companies Act.
The purpose of accounting is narrow to many. Many consider the role of accounting is limited to maintain books of accounts for a limited purpose of filing income-tax return to satisfy the curiosity income-tax department. This is only a part of the full story. The chief objective of maintaining...
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