ACCOUNTSFORMANAGER

Seema SinghPinal Patel

FUNDAMENTAL

S OF

ACCOUNTING

DEFINITIONS OF ACCOUNTING Accounting is the systematic recorded presentation of the financial activities of the business/ Enterprise.

oAccounting is an art of identifying, classifying, recording, summarizing and interpreting business transactions of financial nature.

o Smith and Ashburne, “Accounting is a means of measuring and reporting the results of economic activities.”

o In the opinion of Bierman and Derbin, “Accounting may be defined as the identifying, measuring, recording and communicating of financial information.”

HISTORY OF ACCOUNTING

The role of accounting has changed from that of a mere record keeping during the 1st decade of 20th century to the present stage, when it is accepted as information system and decision making activity.The term accounting is becoming gradually broader. It is evident from definition of accounting arranged in historical order:

i. 1941 The American Institute of Certified Public Accountants (AICPA) 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, at least, of a financial character and interpreting the result thereof.”

ii. 1966 The American Accounting Association (AAA) defined accounting as : “ The process of identifying, measuring and communicating economic

information to permit information to permit informed judgements and decisions by uses of the information.”

iii. 1970 Accounting Principles Board (ABP) and AICPA states : “The function of Accounting is t provide quantitative information

primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.”

Communication

Analysing and interpreting the business transactions

Summarizing the business transactions

Recording the business transactions

Measurement in terms(Rupees)

Classification of the business transaction

Identification to the economics

ACCOUNTING PROCESS

FUNCTIONS OF ACCOUNTING IN BREIF

As we know accountancy is the numerative expression of accounting events, so it generates data for its users. Accounting data performs the following functions:1. Measurement of past performance.

Accounting keeps proper record of all economic events, prepares ledger accounts and reports the result of past performance. Here, accounting period is supposed to consist of 12 months. We record and report only those economic events, which have already occurred. We do not record possibilities and expectations.

2. Forecasting future performance.Accounting data of the past is also used to forecast the future possibilities and performance. A rough estimate of future production, sales, profit and value of assets are made on the basis of accounting information.

3. Helping decisions making.The management is required to formulate future policies and take important decisions. The decision making process needs accounting information as source documents. The various users of accounting information use accounting data for making their own decisions, concerning their interest.4. Controlling of performance.The actual performance of the business is compared with the business is compared with the desired performance and deviations, if any are ascertained. We identify the areas of weakness and apply remedial measures.5. Honouring legal commitments of the business.Accounting data must be prepared and presented to honour the legal formalities of various acts and government legislations, such as provisions of Income Tax Act, Sales Tax Act, Partnership and Companies Acts etc.

USERS OF ACCOUNTING INFORMATION

External UsersInternal Users

Internal Users

1.Owners:- Owners provide funds for the operations of a business and they want to know about profits and losses of the business, their amount of capital, amount of current and fixed assets, debtors and creditors of the profitability of the business.

2. Managers:- Managers need accounting information for the efficient management of the business. For Example,What is the cost of production? What should be the selling price of the product? Whether the sales are increasing or decreasing and appraising the performance of the subordinates etc.Ail such informations are provided by the accounts department.

3. Employees:- Employees are interested to know the profitability and growth of the business to assess the ability of business to pay more wages, bonus and other monetary incentives.

EXTERNAL USERS

1.Investors: Investors need accounting information about the profitability and financial position of the business. With the help of accounting information they evaluate the past performance and future prospectus of the business. Thus, investors decisions are dependent upon accounting information included in the financial statements.

2. Creditors/ Suppliers: Creditors/Suppliers are the persons who have sold the goods to the business on credit. They want to be sure that their payments are secure or not. They are more interested in the information relating to current assets and current liabilities.

3. Banks: Banks want to judge the profit earning capacity and the financial position of the business, before granting a loan to the business. Such information are provided by accounting deptt.

4. Customers: Customers have an interest in information about the continuation of an enterprise, especially when they have established a long-term involvement with or are dependent on the enterprise.

5. Government: Government is interested in accounting information on account of assessment of income tax, sales tax, excise duty etc. thus, Government wants that the accounts are maintained in proper manner.

Branches of AccountingBranches of Accounting

Cost Accounting

Tax Accounting

Conclusion

Financial Accounting

Other Branches

Tax Accounting

Conclusion

Cost Accounting

ManagementAccounting

Difference Between Financial Accounting And Managerial Accounting

Financial Accounting Reports to those outside the organization owners, lenders, tax authorities and regulators. Managerial Accounting Reports to those inside the organization for planning, directing and motivating, controlling and performance evaluation.

Financial Accounting Emphasis is on summaries of financial consequences of past activities.

Managerial Accounting Emphasis is on decisions affecting the future.

Financial Accounting Objectivity and verifiability of data are emphasized.

Managerial Accounting Relevance of items relating to decision making is emphasized.

Financial Accounting Precision of information is required.

Managerial Accounting Timeliness of information is required.

Financial Accounting Only summarized data for the entire organization is prepared.

Managerial Accounting Detailed segment reports about departments, products, customers, and employees are prepared.

Financial Accounting Must follow Generally Accepted Accounting Principles (GAAP).

Managerial Accounting Need not follow Generally Accepted Accounting Principles (GAAP).

Financial Accounting Mandatory for external reports.

Managerial Accounting Not mandatory.

Managerial v/s Financial Accounting

Management AccountingPurpose:

To provide managers with information, useful in planning and controlling business operations, and making decisions.

Types of Reports:Many types of reports depending upon nature of the business and specific information needs of management

Financial AccountingPurpose:

To provide a wide variety of decision makers with useful information about the financial position and operating results of a business entity.

Types of Reports:Financial statements, income tax returns and special reports.( loan applications and reports to regulatory agencies).

Managerial v/s Financial Accounting

Management Accounting

Standards for Presentation:No specific rules: whatever theinformation is most relevantto the needs of management.

Reporting Entity:A subdivision of the business.

Time Periods Covered:Any period year, quarter month,week,day,even a work-shift. Some reports are historical in nature other focus on estimates of results expected in future.

Financial Accounting

Standards for Presentation:Generally involve accepted accounting principles in income tax returns, tax regulations.

Reporting Entity:The company viewed as a whole.

Time Periods Covered:Usually a year, quarter or month. Most reports focus on completed periods.

Managerial v/s Financial Accounting

Management Accounting

Users of Information:

Management (different reports to different managers).

Managerial accounting reports usually are not distributed to outsiders.

Financial AccountingUsers of Information:

Outsiders as well as

managers.

Income tax returns

normally go only to tax

authorities.

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