NATURE AND SCOPE OF ACCOUNTING

According to the American Institute of Certified Public Accountant (AICPA), 1941, “accounting
is an art of recording, classifying and summarizing in significant manner and in terms of money
transactions and events which are in part, at least of a financial character and interpreting the
results thereof”.
According to the American Accounting Association (AAA), 1966, accounting is defined as “a
process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of the information”.
NATURE OF ACCOUNTING:
The nature of accounting reflects its practical and informative role in business. It includes:
Systematic Process – It records all financial transactions in an organized manner.
Preparation of Reports – It involves summarizing and reporting financial data.
Interpretation of Results – It helps understand the financial impact of business activities and
informs stakeholders.
Communication Tool – It acts as a bridge between the business and its internal or external users
by providing financial insights.
SCOPE:
Accounting has a broad scope, encompassing several critical functions essential to business
operations. These include:
Recording (Bookkeeping):
This is the foundational function of accounting, where all financial transactions are
systematically recorded in the journal on a day-to-day basis, ensuring a complete and accurate
financial record.
Classifying:
Recorded transactions are sorted and grouped according to their nature into various ledger
accounts, making it easier to track the financial position of each account.
Summarising:
The classified data is then compiled and presented in financial statements such as the trial
balance, profit and loss account, and balance sheet, which summarize the financial performance
and position of the business.
Analysing and Interpreting:
This involves breaking down financial data using tools like ratios, comparative analysis, and
trend analysis, helping stakeholders understand the business’s profitability, liquidity, and
solvency.
Communicating:
Once analysis is complete, the results are communicated to internal and external users through
structured reports. These include financial statements, graphs, charts, and management reports,
which help in strategic planning and compliance.

ACCOUNTING THEORY AND ITS FEATURES

Accounting theory is a framework that explains the complete system, procedures, processes,
policies, and practices of accounting. It is not a strict scientific theory but serves as a structured
approach to maintaining accounting books and recording business transactions systematically.
This theory provides guidance on various accounting methods such as First-In-First-Out (FIFO),
Last-In-First-Out (LIFO), Ratio Analysis, Cash Flow Analysis, and Fund Flow Analysis.
Accounting theory helps in maintaining financial records systematically and improving decision-
making by providing structured data for analysis. It plays a key role in budgeting, forecasting,
and adapting to economic changes by evolving with new regulations and technology. It ensures
transparency, accountability, and compliance with tax laws while also aiding in risk management
by identifying financial trends.
FEATURES
Explains Accounting Practices
Accounting theory provides a structured framework for recording, classifying, summarizing,
analysing, and interpreting financial transactions. It establishes guidelines that help maintain
financial records systematically, ensuring accuracy and consistency in financial reporting.
Provides Fundamental Principles
It defines core principles such as the Accrual Principle, Matching Principle, and Consistency
Principle, which serve as the foundation of financial accounting. These principles ensure that
financial statements are prepared in a logical and standardized manner.
Dynamic and Evolving
Since the business environment is constantly changing due to new financial trends, technologies,
and regulatory policies, accounting theory remains dynamic. It continuously adapts to these
changes to ensure that accounting practices remain relevant and effective.
Ensures Standardization and Comparability
Accounting theory promotes uniform accounting methods across businesses and industries. This
standardization allows for the easy comparison of financial statements, which is essential for
investors, creditors, and regulators in evaluating business performance.
Enhances Financial Decision-Making
By providing accurate and well-structured financial data, accounting theory helps managers,
investors, and policymakers make informed decisions. Financial statements prepared using
proper accounting principles serve as a reliable basis for planning and strategy formulation.
Supports Legal and Regulatory Compliance
Accounting theory ensures compliance with legal and regulatory frameworks such as
International Financial Reporting Standards (IFRS) and Generally Accepted Accounting
Principles (GAAP). This prevents fraudulent activities and helps businesses avoid legal
consequences.
Aids in Financial Analysis and Interpretation
By introducing analytical tools such as ratio analysis, trend analysis, and cost accounting
methods, accounting theory helps businesses assess their financial health. This analysis allows
businesses to measure profitability, liquidity, and overall financial stability.
Guides Auditing and Internal Controls
Accounting theory provides a clear financial structure that facilitates auditing and internal
controls. It helps detect errors and fraud, ensuring transparency and accountability in financial
transactions and statements.
Integrates International Accounting Standards
With globalization, businesses need to follow internationally accepted accounting principles.
Accounting theory ensures that financial reporting aligns with global standards, making financial
statements comparable across different countries.
Promotes Ethical Accounting Practices
One of the most important aspects of accounting theory is its emphasis on ethical financial
practices. It ensures honesty, accuracy, and full disclosure of financial information, discouraging
unethical manipulations such as falsifying records or hiding financial losses.
SETTING UP ACCOUNTING STANDARDS
Procedure for Formulating Accounting Standards in India
In India, the Accounting Standards Board (ASB), formed by the Institute of Chartered
Accountants of India (ICAI) on 21st April 1977, is responsible for the formulation of accounting
standards. The ASB follows a well-structured six-step procedure to ensure that the accounting
standards are suitable, practical, and in line with business needs and regulations. The process
involves expert consultation, public opinion, and careful analysis.
Step 1: Identifying the Areas
The first step is to identify the topics or areas where an accounting standard is required. These
may be areas where no specific rule exists, or where current accounting practices vary across
businesses. The ASB selects such areas based on business importance, practical issues, and
changes in laws or global practices.
Step 2: Collecting Views and Opinions
Next, the ASB discusses the selected topic with various groups such as:
 Government departments
 Public sector companies
 Industry experts
 Professionals and business associations
This helps the ASB understand the practical difficulties and opinions from different types of
businesses and users.
Step 3: Taking Help from Study/Research Groups
After collecting views, the ASB takes help from specially formed study groups or research
groups. These groups study the topic in detail, examine international practices like IFRS, and
suggest ways to prepare a suitable accounting standard for Indian conditions.
Step 4: Preparing the Exposure Draft
With the help of the study group’s input, the ASB prepares a draft of the proposed accounting
standard, called the Exposure Draft. This draft includes:
 Meaning and explanation of terms
  Related accounting concepts and principles
 Method of applying those principles
 Presentation and disclosure requirements
 Types of businesses the standard will apply to
 References and data sources used
The Exposure Draft is then published for comments from the public, ICAI members, auditors,
companies, and others. This step ensures transparency and public participation.
Step 5: Finalizing the Standard and Submitting to ICAI
After receiving feedback on the exposure draft, the ASB makes necessary changes and prepares
the final version of the proposed accounting standard. This final draft is then submitted to the
ICAI Council for approval.
Step 6: Issuing the Accounting Standard
The ICAI Council reviews the final draft. If required, it may suggest changes or seek
clarification from the ASB. After mutual agreement, the final Accounting Standard is approved
and officially issued. The standard then becomes applicable to businesses from a specific date as
notified.

LIST OF ACCOUNTING STANDARDS

Accounting Standards are written policy documents issued by expert accounting bodies that
provide guidelines for the preparation and presentation of financial statements. These standards
ensure consistency, transparency, and comparability of financial information across organizations
over time. They help in maintaining uniformity in accounting practices and enhance the
reliability of financial reports for stakeholders.
List of Accounting Standards in India:
 Ind AS 1 – Presentation of Financial Statements (Corresponds to IAS 1)
 Ind AS 2 – Inventories (Corresponds to IAS 2)
 Ind AS 7 – Cash Flow Statements (Corresponds to IAS 7)
 Ind AS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
(Corresponds to IAS 8)
 Ind AS 10 – Events after the Balance Sheet Date (Corresponds to IAS 10)
 Ind AS 12 – Income Taxes (Corresponds to IAS 12)
 Ind AS 16 – Property, Plant and Equipment (Corresponds to IAS 16)
 Ind AS 19 – Employee Benefits (Corresponds to IAS 19)
  Ind AS 20 – Accounting for Government Grants and Disclosure of Government
Assistance (Corresponds to IAS 20)
 Ind AS 21 – The Effects of Changes in Foreign Exchange Rates (Corresponds to IAS 21)
 Ind AS 23 – Borrowing Costs (Corresponds to IAS 23)
 Ind AS 24 – Related Party Disclosures (Corresponds to IAS 24)
 Ind AS 27 – Separate Financial Statements (Corresponds to IAS 27)
 Ind AS 28 – Investments in Associates and Joint Ventures (Corresponds to IAS 28)
 Ind AS 32 – Financial Instruments: Presentation (Corresponds to IAS 32)
 Ind AS 33 – Earnings Per Share (Corresponds to IAS 33)
 Ind AS 34 – Interim Financial Reporting (Corresponds to IAS 34)
 Ind AS 36 – Impairment of Assets (Corresponds to IAS 36)
 Ind AS 37 – Provisions, Contingent Liabilities and Contingent Assets (Corresponds to
IAS 37)
 Ind AS 38 – Intangible Assets (Corresponds to IAS 38)
 Ind AS 40 – Investment Property (Corresponds to IAS 40)
 Ind AS 41 – Agriculture (Corresponds to IAS 41)

CLASSIFICATION OF ACCOUNTING THEORY

1.Based on Methodology:
a) Descriptive Theories:
Descriptive theories seek to systematically observe, record, and explain existing accounting
practices. They describe real-world accounting procedures without passing any judgment. These
theories form the basis for understanding conventional accounting practices and are grounded in
observed facts. They help explain how accounting methods have evolved from practical use.
b) Normative Theories:
Normative theories focus on what accounting should be, rather than what it is. They involve
value judgments and propose ideal accounting practices based on logical reasoning. Accountants
use this approach to determine the best way to report financial information, aiming to improve
the relevance and usefulness of financial statements.
2. Based on Supporting Disciplines:
a) Decision Theory:
This theory helps in understanding how accounting information supports decision-making. It
involves identifying a problem, analysing alternatives, and selecting the best solution. Since
accounting plays a major role in providing relevant financial data, Decision Theory is central to
modern accounting. It is both descriptive (explains decisions) and normative (guides better
decisions). Organizations like FASB and reports such as the Trueblood Committee have
recognized its importance.
b) Measurement Theory:
Measurement Theory connects accounting to the process of assigning numerical values to
financial events. In accounting, money is the standard unit of measure used to represent business
transactions. This theory emphasizes that accounting is a measurement discipline that provides
quantitative data on income, assets, and liabilities. As a normative theory, it focuses on
establishing proper measurement rules for financial reporting.
c) Information Theory:
Accounting is considered an information system that communicates financial data to users like
investors, managers, and regulators. Information Theory explains the role of accounting in
reducing uncertainty and improving the quality of decisions. According to this theory, only data
that is relevant, verifiable, unbiased, and measurable becomes useful accounting information. It
also highlights the cost-benefit aspect of information—more information adds value but also
increases cost, so an optimal balance must be maintained.