Definition and Meaning of Accounting :

The American Institute of Certified Public Accountants (AICPA) has defined

accounting as “The art of recording, classifying and summarising, in a significant

manner and in terms of money, transactions and events which are, in part atleast,

of a financial character and interpreting the results thereof”.

According to the American Accounting Association, “Accounting is the process of

identifying, measuring and communicating economic information to permit

informed judgement and decision by user of the information”.

Accounting is the process of :

(i) identifying or ascertaining business transactions

(ii) measuring those business transactions in terms of money

(iii) recording those business transactions in the book or books of original entry

called the journal or subsidiary books

(iv) classifying or posting the entries found in the book or books of original

entry to appropriate accounts in the ledger, the book of final entry

(v) summarising (Trial Balance) or preparation of financial statements like the

profit and loss account and the balance sheet from the ledger accounts,

(vi) analysis and interpretation of financial statements for drawing conclusions

and:

(vii) communicating the results of the interpretation to the end users of

accounting information for making sound decision.

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Meaning of Book-keeping:

Book-keeping is the process of recording business transactions in proper books of

accounts in a systematic manner (i.e., in accordance will the principles or rules laid

down by accountancy) so that financial information on any point of the business is

readily available.

Activities covered by Book-keeping:

Book-keeping covers the following activities:

(a) Identification of business transactions to be recorded.

(b) Measuring those business transactions in terms of money.

(c) Recording those business transactions in the book or books of original entry

(i.e., either in a single book of original entry, called the journal, or in a number

of books of original entry', called the Subsidiary books).

(d) Posting the entries from the book or books of original entry to appropriate

accounts in the Book of final entry, called the ledger (i.e', preparation of ledger

accounts).

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 ACCOUNTANCY

Meaning of Accountancy:

Accountancy is the science of accounting, which explains why and how to maintain

books of accounts, how to prepare and interpret financial statements and how to

communicate the results of the interpretation to the end – users. In short, it is science

or body of knowledge which prescribes the principles governing accounting.

Distinction between Book – Keeping and Accounting:

Book-keeping Accounting

Book-keeping is just the process of Accounting comprises the recording of

recording business transactions in books business transactions in books of

of accounts. accounts, the preparation of financial

statements and the analysis and

interpretation of the financial

statements.

Book-keeping is the first stage of Accounting is the second stage of

maintenance of books of accounts. maintenance

of books of accounts.

Book-keeping does not produce Accounting is mainly concerned with

financial statements like the profit and the preparation of financial statements.

loss account and the balance sheet

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Book-keeping represents the art aspect Accounting represents the art and

of recording of business transactions. science aspects of recording of business

transactions.

The work of book- keeping is of routine The work of accounting is of technical

and clerical nature. and complicated nature

As the work of book -keeping is of As the work of accounting is of technical

routine and clerical nature, it is entrusted and

to junior staff of the accounts complicated nature, it is entrusted to the

department, called the book-keepers or senior staff of the accounts department,

account clerks. called the accountants.

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Distinction between Accountancy and Accounting:

Accountancy Accounting

Accountancy is a discipline (i.e., a branch Accounting is the science and art of

of knowledge or a subject of study), actual recording, classifying,

consisting, of certain principles or rules, summarising, and analysing

governing the science and art of interpreting financial transactions

recording, classifying, summarising, and according to the principles of

analysing financial transactions. accountancy.

Accountancy is the basic subject, Accounting is one of the aspects of

embracing book-keeping and accountancy.

accounting.

Accountancy professes. That is, Accounting practises. That is,

accountancy is a theoretical study. accounting is a practical work.

Accountancy, with its set of principles, is Accounting (i.e., the mere recording of

definitely a science. business transactions) is more an art

In respect of their relative importance in Accounting can be regarded as the

accounting system, accountancy can be mother.

regarded as the father.

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Differences Between Book – Keeping, Accounting and Accountancy:

Book -Keeping Accounting Accountancy

It is the systematic It is book-keeping plus It is book-keeping plus

maintenance of books summarising and Accounting plus

of accounts interpretation of financial communicating the

statements. results of interpretation of

financial statements to the

end users.

It has a Limited scope. It has a wider scope. Its scope is the widest.

It cannot be regard as It cannot be regarded It is regard as discipline or

a discipline. as a discipline. subject of study.

Book-keeping is a Accounting also is a Accountancy is a

practical work. practical work. theoretical study.

It is an art. It is more of an art, and It is a science and also an

less of a science. art.

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BRANCHES OF ACCOUNTING:

l. Financial accounting

2. Cost accounting

3. Management accounting

1. Financial Accounting :

Financial accounting is that branch of accounting which is concerned with the

recording of business transactions in the books of account and the periodic

presentation of the financial results of the business in the form of financial statements

to the end users.

2. Cost Accounting :

Cost accounting is the special accounting mechanism for cost finding (i.e.,

ascertainment of cost of products or services), cost control, ascertainment of

profitability of activities carried out or planned and reporting (i.e., presentation) of

cost data to the management for decision making. In short, cost accounting is that

branch of accounting which is mainly concerned with the presentation of costing

information which is useful to the management for purpose of cost ascertainment and

cost control.

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3. Management Accounting :

Management accounting is the technique of analysis and interpretation of facts, results

and information revealed by financial accounting, cost accounting and other books

and records kept by the business for the benefit of managers who are in charge of

managing the business more efficiently.

Role or Function of Accounting:

a. Recording -keeping of historical record

b. As a language of business
c. As an information system
d. As a protector of properties
e. As a means of control over the business
f. As a means of compliance of legal requirement

Advantages of accounting:

a. Maintenance of permanent records of business

b. Ascertainment of profit or loss
c. Ascertainment of the progress of the business
d. Ascertainment of financial position
e. Ascertainment of amounts due to the business
f. Ascertainment of amounts due to from the business
g. Documentary evidence
h. Prevention of error and frauds
i. Control over activities and properties
j. Helpful to the management
k. Satisfaction of legal requirements
l. Provision of information to external users

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Limitations of Accounting :

1. Only monetary transactions are recorded. Non-monetary transactions (i.e.,

transactions which cannot be expressed in terms of money) are reduced.
2. They give only approximate information. This is because in accounting,
sometimes, estimates (i.e., estimate figures) are used.
3. Accounting figures may be manipulated, as designed by the owners or by the
management.
4. Balance sheet, prepared in accounting, does not show the present value of the
business, as the assets and liabilities are shown in the balance sheet at costs or
book values, and not at market values.
5. In accounting, provision is made for prospective losses, but prospective profits
are not considered. As a result, the exact state of affairs of the business is not
revealed.
6. Accounting records are historical records (i.e., records of past events). So, they
are not of much use in the current or present situation.
7. Accounting records are subjective, and not objective, as they are influenced by
the personal judgements of the accountant.

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