CA Darshan Jain

CA , CS , DISA , DIRM , LLB (P) , B.COM

A Chartered Accountant & A Company Secretary By

Profession & A Educator By Passion.

Teaching Financial Accounting & Financial

Management to CA Students Since Last 9 years.
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MEANING
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SCOPE OF ACCOUNTING
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 MEANING
&
SCOPE OF ACCOUNTING
 BIRDS EYE VIEW
❑ Introduction
❑ Meaning of Accounting – Traditional & Modern Definition
❑ Procedural Aspects of Accounting
❑ Objectives of Accounting
❑ Functions of Accounting
❑ Advantages of Accounting
❑ Limitations of Accounting
❑ Book Keeping , Accounting & Accountancy
❑ User’s of Accounting Information
❑ Relationship of Accounting with other Disciplines
❑ Role of Chartered Accountant in Society
 INTRODUCTION
The development in the field of accounting has been closely associated with the growth of business. The business
today has become large in size and complex in nature. In view of utility of accounting statements, it is necessary
to recognize scientific approach to the recording and reporting of business transactions. In the absence of
scientific approach, accountants will be free to use their own language and whatever they will record, will not
necessarily be understood in the same sense by other person concerned. Thus the uniformity in understanding
the accounting records is possible only when same standard language is used. Accounting is often called the
language of business. The basic function of any language is to serve as a means of communication. Accounting
also serves this function.

In its oldest form accounting aided the stewards to discharge their stewardship function. The wealthy men
employed stewards to manage their property ; the stewards in turn rendered an account periodically of their
stewardship. This ‘Stewardship Accounting’ was the root of financial accounting system. The presently followed
system of double –entry book-keeping has been developed only in the 15th Century. However, historians found
records of debit and credit dating back to the 12th century. Although double –entry system was followed,
“Stewardship Accounting” served the purpose of business and wealthy persons at that time. In India too,
stewardship accounting was prevalent till the emergence of large scale enterprise in the form of public limited
companies.
 MEANING OF ACCOUNTING
Traditional Definition

‘’accounting is an art of recording, classifying and summarizing in a significant manner and in

terms of money, business transaction and events which are in part at least, of financial character
and interpreting the results thereof.’’

Modern Definition

“Accounting can alternatively be defined as an information System, which accepts the financial
transactions and events as input, process them in the form of Ledger and Trial Balance, Final
Accounts, FFS, CFS, analysis and interpretation etc. and the output of which is accounting Reports
which are communicated to users of accounts.”
 MEANING OF TRANSACTION
Transactions : In common parlance, Transaction means the act of performance, an exchange, a transfer, etc.
However, for the purpose of accounting, only those transactions are taken into consideration which are of financial
nature. Financial transactions are those transactions :

--- which alter the financial position of concern, and

--- which can be measured in the terms of money.

Examples –

a) Purchase of Assets for Rs. 1,00,000 is a financial transaction, Because it alters the financial position of the
concern, i.e. reduce the cash balance by Rs. 1,00,000 and increase the Assets by Rs. 1,00,000

b) Suppose the customers of a firm are unsatisfied,, due to a sudden change in the sales policies, then although
it would have a very bad effect on business, but since that effect cannot be measured in terms of money, so
this is not a financial transaction, and so will not be recorded in the books of account.
 MEANING OF EVENT

Events : The consequence of a transaction is known as events. The distinction between

transactions and events can be properly understood with the help of following example:

Suppose Mr. X starts business with the cash of RS. 1,00,000. During the whole year, he makes
purchase and sale of goods and thus earns the net profit of Rs. 10,000. At the end of the year, he
has the cash balance of Rs. 15,000, stock of goods of Rs. 50,000 and sundry debtors of Rs.
45,000.

In this situation, starting of business, purchasing of goods and selling of goods are financial
transactions and earning the profit of RS. 10,000, having the cash balance of Rs. 15,000, having
the stock of Rs. 50,000 and having the sundry debtors of Rs. 45,000 are the events.
 PROCEDURAL ASPECTS OF ACCOUNTING
1. Recording -- This is the basic function of accounting. All business transactions of a financial character, as
evidenced by some documents such as sales bill, pass book, salary slip etc. are recorded in the books of
account. Recording is done in a book called ‘’Journal.’’

2. Classifying – Classification is concerned with the systematic analysis of the recorded data, with a view to
group transactions or entries of one nature at one place so as to put information in compact and usable form.
The book containing classified information is called “Ledger”. This book contains on different pages,
individual account heads under which, all financial transactions of similar nature are collected. For example,
there may be separate account heads for Salaries. Rent, Printing and Stationeries, Advertisement etc. All
expenses under these heads, after being recorded in the Journal, will be classified under separate heads in the
ledger. This will help in finding out the total expenditure incurred under each of the above heads.

3. Summarizing – It is concerned with the preparation and presentation of the classified data in a manner
useful to the internal as well as the external users of financial statements. This process leads to the
preparation of the following financial statements: a) Trial balance b) Profit and Loss account c) Balance Sheet
d) Cash-flow Statement.
4. Analyzing – The term ‘Analysis’ means methodical classification of the data given in the financial statements.
The figures given in the financial statements will not help anyone unless they are in a simplified form. For
example, all items relating to fixed assets are put at one place while all items relating to current assets are put
at another place.

5. Interpreting – This is the final function of accounting . it is concerned with explaining the meaning and
significance of the relationship as established by the analysis of accounting data. The recorded financial data
is analyzed and interpreted in a manner that will enable the end- users to make a meaningful judgement
about the financial condition and profitability of the business operations. The financial statement should
explain not only what had happened but also why it happened and what is likely to happen under specified
conditions.

6. Communicating – It is concerned with the transmission of summarized, analysed and interpreted information
to the end-users to enable them to make rational decisions. This is done through preparation and distribution
of accounting reports, which include besides the usual profit and loss account and the balance sheet,
additional information in the form of accounting ratios, graphs, diagrams, fund flow statements etc.
 OBJECTIVES OF ACCOUNTING
1. Systematic recording of transactions – Basic objective of accounting is to systematically record the financial
aspects of business transactions i.e. book-keeping. These recorded transactions are later on classified and
summarized logically for the preparation of financial statements and for their analysis and interpretation.

2. Ascertainment of results of above recorded transaction – accountant prepares profit and loss account to
know the results of business operations for a particular period of time. If revenue exceed expenses then it is
said that business is running Profitably but if expenses exceed revenue then it can be said that business is
running under loss. The profit and loss account helps the management and different stakeholders in taking
rational decisions.

3. Ascertainment of the financial position of the business – Businessman is not only interested in knowing the
results of the business in terms of profits or loss for a particular period but is also anxious to know that what
he owes (liability) to the outsiders and what he owns (assets) on a certain date. To know this, accountant
prepares a financial position statement popularly known as Balance Sheet. The balance sheet is a statement
of assets and liabilities of the business at a particular point of time and helps in ascertaining the financial
health of the business.
4. Providing information to the users for rational decision-making – Accounting as a language of business’
communicates the financial results of an enterprise to various stakeholders by means of financial statements.
Accounting aims to meet the information needs of the decision – makers and helps them in rational decision-
making .

5. To know the solvency position - By preparing the balance sheet, management not only reveals what is
owned and owed by the enterprise, but also it gives the information regarding concern’s ability to meet its
liabilities in the short run (liquidity position ) and also in the long-run (solvency position) as and when they fall
due.
 FUNCTIONS OF ACCOUNTING
In 1970 , The Accounting principles Board (APB) of American Institute of Certified Public Accountants (AICPA)
enumerated the functions of accounting as follows-

“The function of Accounting is to provide quantitative information, primarily of financial nature , about economic
entities , that is needed to be useful in making economic decisions”.

The other specific functions of accounting are as follows -

1. Measurement : Accounting measures past performance of the business entity and depicts its current financial
position.

2. Forecasting : Accounting helps in forecasting future performance and financial position of the enterprise using
past data.

3. Decision-making : Accounting provides relevant information to the users of accounts to aid rational decision-
making.
4. Comparison & Evaluation : Accounting assesses performance achieved in relation to targets and discloses
information regarding accounting policies and contingent liabilities which play an important role in predicting,
comparing and evaluating the financial results.

5. Control : Accounting also identifies weaknesses of the operational system and provides feedbacks regarding
effectiveness of measures adopted to check such weaknesses.

6. Government Regulation and Taxation : Accounting provides necessary information to the government to
exercise control on the entity as well as in collection of tax revenues.
 ADVANTAGES OF ACCOUNTING
1. Facilitates to Replace Memory : Accounting facilitates to replace human memory by maintaining complete
record of financial transactions. Human memory is limited by its very nature. Accounting helps to overcome
this limitation.

2. Facilitates to Comply with Legal Requirements : Accounting facilitates to comply with legal requirements
which require an enterprise to maintain books of accounts.

3. Facilitates to Ascertain Net Result of Operations : Accounting facilitates to ascertain net results of operations
by preparing income statement.

4. Facilitates to Ascertain Financial Position : Accounting facilitates to ascertain financial position by preparing
Position Statement.

5. Facilitates the Users to take Decisions : Accounting facilitates the users to take decisions by communicating
accounting information to them.

6. Assists the Management : Accounting assists the management in planning and controlling business activities
and in taking decisions.
7. Facilitates a Comparative Study :
i) Comparison of actual figures with standard or budgeted figures for the same period and the same firm;
ii) Intra-firm comparison
iii) Inter-firm comparison
iv) Pattern Comparison

8. Facilitates Control over Assets : Accounting facilitates control over assets by providing information regarding
Cash Balance. Bank Balance, debtors, Fixed Assets, Stock etc.

9. Facilitates the Settlement of Tax Liability : Accounting facilitates the settlement of tax liability with the
authorities by maintaining proper books of accounts in systematic manner.

10. Facilitates the Ascertainment of Value of Business : Accounting facilitates the ascertainment of value of
business in case of transfer of business to another entity.

11. Facilitates Raising Loans : Accounting facilitates raising loans from lenders by providing them historical and
projected financial statements.

12. Acts as Legal Evidence : Proper books of accounts maintained in systematic manner act as legal evidence in
case of disputes.
 LIMITATIONS OF ACCOUNTING
1. Only transactions which can be measured in terms of money can be entered in the accounts. So events how so ever
important they may be to the business, do not find a place in the accounts, if they cannot be measured in terms of
money.

2. Balance Sheet shows the position of the business on the day of its preparation and not on the future date while the
users of the accounts are interested in knowing the position of the business in the near future and also in long run
and not for the past date.

3. According to the cost concept, assets are recorded at historical cost and ignore the changes in value of assets
brought about by changing value of money and market factors.

4. Accounting ignores changes in some money factors like inflation etc.

5. There is conflict between one accounting principle and another e.g. stock-in-trade is valued on the basis of cost or
market price whichever is lower. Therefore in one year cost basis may be taken, whereas in another year it may be
market price. This system contravenes the accounting principle of consistency.

6. The balance-sheets is largely the result of personal judgment of the accountant with regard to adoption of accounting
policies. Therefore accounts are affected by subjectivity factor.
 MEANING OF BOOK KEEPING
Book-keeping is a part of accounting and is concerned with record keeping or maintenance of
books of accounting which is often routine and clerical in nature. It only covers the following four
activities:

a) Identifying the transactions and events

b) Measuring the identified transactions and events in a common measuring unit

c) Recording the identified and measured transactions and events in Proper Books of Accounts

d) Classifying the recorded transactions and events in ledger.

RELATION OF BOOK KEEPING , ACCOUNTING &
ACCOUNTANCY

Accountancy

Accounting

Book
Keeping
 DIFFERENCE BETWEEN BOOK KEEPING & ACCOUNTING
S.No. Book – Keeping Accounting

It is a process concerned with recording & It is a process concerned with summarizing of the
1
Classification of transactions. recorded transactions.

2 It constitutes as a base for accounting. It is considered as a language of the business.

Financial statements do not form part of Financial statements are prepared in this process
3
this process. on the basis of book – keeping records.
Managerial decisions cannot be taken with Management takes decisions on the basis of these
4
the help of these records. records.
It has several sub-fields like financial accounting,
5 There is no sub – field of book – keeping.
management accounting etc.
Financial position of the business cannot
Financial position of the business is ascertained on
6 be ascertained through book-keeping
the basis of the accounting reports.
records.
 SUB FIELDS OF ACCOUNTING
1. Financial Accounting : it is the original form of Accounting Basically, it is concerned with the recording and
classifying, Analyzing, Summarizing and interpreting of financial transaction and events and communicating
the results, derived therefrom to the users of the financial statements.
The main purpose of this accounting is –
- To keep up-to-date record of events and transactions.
- To ascertain the financial position of the concern, and
- To communicate the actual position to the interested parties

2. Management Accounting : As the name suggests, it is the accounting for management. This accounting
provides useful information to management to discharge their functions. The management accounting covers
various areas, such as financial accounting, cost accounting, budgetary control, inventory control, statistical
methods, internal auditing etc.

3. Cost Accounting : it is mainly concerned with the determination of the cost of each product so that the
reasonable selling price of the product may be determined. The purpose of this branch of accounting is to
ascertain the cost, to control the cost and to communicate the information to the decision maker.
4. Social responsibility Accounting : Nowadays, this new branch of accounting has also been developed. It is
the accounting of social aspect of business. It is the process of identifying and measuring the social effects of
the business decisions and communicating to the users of accounts and society.

5. Human Resource Accounting : Human Resource Accounting is an attempt to identify, quantify and report
investment made in human resources of an organization.

6. Inflation Accounting : The Accounting which deals with effects of price-rise is known as inflation accounting
 USERS OF ACCOUNTING – INTERNAL USERS
1. Management : They need information about :
a) Short-term solvency of the firm
b) Long-term solvency of the firm
c) Activity position of the firm (viz., effective Utilization of its resources)
d) Profitability in relation to turnover
e) profitability in relation to investments.
 USERS OF ACCOUNTING – EXTERNAL USERS
1. Short-term Creditors : They need information to determine :
a) Whether the amount Owing to them will be paid When due
b) Whether they should extend, maintain or restrict Credit to an individual enterprise.

2. Long-Term Creditors : Long-term creditors need information to determine :

a) Whether their principal and the interest thereon will be paid when due
b) Whether they should extend, maintain or restrict the Credit to an enterprise.

3. Present Investors : Present investors need information :

a) To judge prospects for their investment, and
b) To determine whether they should buy, hold or sell the shares

4. Potential investors : potential investors need information :

a) To judge prospects of an enterprise, and
b) To determine whether they should buy the shares.
5. Employee Groups : Employee groups need information to form judgment About :
a) Stability, continuity and growth of the enterprise,
b) The ability of a firm to pay wages and other benefits And enhancement.

6. General Public : The general public needs information to evaluate the effectiveness of the economic
entity from which it buys goods or services.

7. Tax Authorities : Tax Authorities need information to assess the tax liabilities of an enterprise.
 ACCOUNTING & OTHER DISCIPLINE
1. Relationship of Accounting With Economics
2. Relationship of Accounting with Mathematics
3. Relationship of accounting with Statistics
4. Relationship of Accounting with Law
5. Relationship of accounting with Management
 RELATIONSHIP OF ACCOUNTING WITH ECONOMICS
Prof. Robbins has defined the term ‘economics’ as follows –
‘’Economics is the science, which studies human behavior as a relationship between ends and scarce means
which have alternative uses.’’

However when a person is to take any economic decision, he has to depend mainly on the accounting
information. Generally an accountant is concerned with the economic problems of only one enterprise, but an
economist is concerned with the problems of an industry as a whole.

Micro level data, arranged by the accounting system, is summed up to get macro level data base. Thus, at the
macro level, accounting provides the basic data,upon which the economic models are developed.

However, there exists a wide gulf between economists & accountants, concepts of income & capital For
example, The profit according to an economist is not same thing as the profit according to an accountant.

No doubt ,accountants have derived the ideas of value, income and capital maintenance from economists, but
suitably modified to make them usable in practical circumstances. Thus, Economics and Accounting are closely
related subjects.
 RELATIONSHIP OF ACCOUNTING WITH MATHEMATICS
Knowledge of arithmetic and algebra is a per-requisite for accounting computations and measurements.
Calculation of interest and annuity, etc. are some examples of fundamental uses of mathematics in accounting.

Presently graphs and charts are being widely used for communicating accounting information to the users. Thus
the knowledge in geometry and trigonometry has become essential to have a better understanding about the
accounting communication system.
 RELATIONSHIP OF ACCOUNTING WITH STATISTICS
Collection, Tabulation, Analysis and presentation of data are some primary functions, which are performed by both
Accountants and statisticians.

An accountant is mainly concerned with the monetary data, although to some extent, he is also concerned with
the quantitative data. But a statistician is concerned equally with the monetary and quantitative data.

The use of statistics, in accounting can be appreciated better in the context of the nature of accounting records.
Accounting information is very precise; it is exact to the last paisa. But for decision-making purposes, such
precision is not necessary and hence the statistical approximations are sought.

Accounting records are generally confined to one year, while statistical analysis is more useful if a longer period is
taken.

Statistical methods are helpful in developing accounting data and in their inter-relation. Therefore the study and
application of statistical methods will add extra edge to the accounting data.
 RELATIONSHIP OF ACCOUNTING WITH LAW
Every business house has to work within legal environment. All the transactions with suppliers and customers are
governed by the Contract Act, Sale of goods Act. Negotiable Instruments Act, etc. The entity, itself, is created and
controlled by law. For example, a partnership business is controlled by Partnership Act, a company is created and
controlled by the Companies Act. Very often the accounting system to be followed has been prescribed by the
law. For example, the companies Act has prescribed the format of financial statements.

However, legal prescription about the accounting system is the product of development in accounting knowledge.
That is to say a legislation about accounting system cannot be enacted unless there is a corresponding
development in the accounting discipline. In that way, accounting influences law and is also influenced by law.
 RELATIONSHIP OF ACCOUNTING WITH MANAGEMENT
Management is a broad occupational field, which comprises many functions and application of many disciplines
including statistics, mathematics, economics, etc. Accountants are well placed in the management and play a key
role in the management team. A large portion of accounting information is prepared for management decision-
making. In the management team, an accountant is in a better position to understand and use data. In other
words, since an accountant plays an active role in management, he understands the data requirement. So,
accounting system can be moulded to serve the management purpose.
 ROLE OF CHARTERED ACCOUNTANT IN SOCIETY

1. Chartered Accountant in Practice

2. Chartered Accountant in Industry
3. Chartered Accountant in Public Sector Enterprise
4. Chartered Accountant in Framing Fiscal Policies
 AREA OF SERVICE BY A PRACTICING CHARTERED
ACCOUNTANT
❑ Maintenance of Books of Accounts

❑ Statutory Audit

❑ Internal Audit

❑ Taxation

❑ Management Accounting & Consultancy

❑ Financial Advise

❑ Investments

❑ Insurance

❑ Business Expansion

❑ Investigations & Secretarial Work