Financial Accounting (part I :-Functions)
MEANING OF FINANCIAL ACCOUNTING:
- Accounting has rightly been termed as the language of the business. The basic function of a language is to serve as a means of communication. Accounting also serves this function. It communicates the result of business operations to various parties who have some stake in the business, namely the proprietors, creditors, investors, government & other agencies.
- Earlier, accounting was considered simply as a process of recording business transactions & the role of accountant as that of record-keeper. However, accounting is now considered to be a tool off management providing vital information concerning the organization’s future. Accounting today is thus more of an information system rather than a mere recording system.
- DEFINITION OF ACCOUNTING:-
- 1)The American Association defines accounting as “the process of identifying, measuring, & communicating economic information to permit informed judgments & decisions by the users of the information.”
- 2)According to AICPA ( American Institute Of Certified Public Accountants ) it is defined as “the art of recording, classifying & summarizing in significant manner & in terms of money, transactions & events which are in part at least of a financial character & interpreting the results thereof.
- MEANING OF BOOK-KEEPING:- Book-keeping is mainly concerned with recording of financial data relating to the business operations in a significant & orderly manner. A book keeper may be responsible for keeping all the records of a business or only of a minor segment, such as a position of the Customers’ accounts in a departmental store. A substantial portion of the book-keeper work is of clerical nature & is increasingly being accomplished through the use of mechanical & electronical devices.
- DEFINITION OF BOOK-KEEPING
1)J. R. Batliboi: – “Book-keeping is the art of recording business dealings in a set of books.
2)R.N.Carter:- “The science & art of correctly recording in the books of accounts all those business transactions that result in the transfer of money or money’s worth.”
- FUNCTIONS OF ACCOUNTING:-
- Recording: – This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an orderly manner. Recording is done in the book “Journal “. This book may be further sub-divided into various subsidiary books such as Cash Journal, Purchase Journal, Sales Journal, etc. The number of subsidiary books to be maintained will be according to the nature & size of the business.
- Classifying: – Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions of nature at one place. The work of classification is a done in the book termed as “Ledger”. This book contains on different pages individual account heads under which all financial transactions of similar nature are collected. 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 heads.
- Summarizing: – This involves presenting the classified data in a manner which is understandable & useful to the internal as well as external end-users of accounting statements. This process leads to the preparation of the following statements: a) Trial Balance b) Income Statement c) Balance Sheet.
- Dealing with Financial Transactions: – Accounting records only those transactions & events in terms of money which are of a financial character. Transactions which are not of a financial character are not recorded in the books of account. For e.g.; if a company has got a dedicated & trusted employees, it is of great use to the business but since it is not of a financial character & capable of being expressed in terms of money, it will not be recorded in the books of the business.
- Analysing and Interpreting: – The recorded financial data is analyzed & interpreted in a manner that the end-users can make a meaningful judgment about the financial condition & profitability of the business operations. The data is also used for preparing the future plans & framing of policies for executing such plans.
- Communicating: – The accounting information after being meaningfully analyzed & interpreted has to be communicated in a proper form & manner to the proper person. This is done through preparation & distribution of accounting reports. The initiative; imagination & innovative ability of the accountant are put to test in thisprocess.