What is Accounting? Meaning, objectives, process, and branches of Accounting

Introduction to Accounting: Meaning, objectives, process, and branches of Accounting

Definition of Accounting According to the American Institute of Certified Public Accountants (Year 1961), accounting is the “art of recording, classifying and summarizing 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”. 

According to the American Accounting Association (Year 1966), accounting is “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of accounting”.

Objectives of Accounting 

Keep Records: To write down all financial transactions.

Find Profit or Loss: To check how much money is earned or lost.

Know Financial Position: To see the overall health of the business.

Follow Rules: To meet legal requirements.

Share Information: To give financial data to investors, creditors, and others.

Plan Ahead: To help in planning and making business decisions.

Protect Assets: To keep track of and safeguard business property.

Process of Accounting(also known as accounting cycle)

Accounting cycle consists of the following sequential steps. 

Ye sirf tumhe samjhane ke liye hai

(a) Identifying the Transactions: 

The first step in the accounting cycle is to analyse the events to determine if they are ‘transactions’.

can they be measured in MONETORY TERMS?

 Only events that leads to change in the financial position of the accounting unit is called transactions. 

(b) Recording transaction in the Journal: 

The second step in the accounting cycle is to record the transactions in the books of original entry i.e., Journal after identifying the Debit and the Credit element.

 (c) Posting to Ledger: (classifying and Summarizing)

 In the next step, the transaction is posted in a summarised and classified manner to different accounts of the ledger. 

(d) Drafting of Unadjusted Trial Balance: 

At the next step, the ledger balances are compiled in the trial balance to check whether there is any error during the recording stage. This stage is, however, not mandatory. 

(e) Passing of adjustment entries: 

Identification of necessary adjustments and passing of adjusting entries make up the fifth step in the cycle. 

(f) Drafting of Adjusted Trial Balance: 

Once all adjusting entries are completed, an Adjusted Trail Balance can be prepared. This happens to be the last step before the preparation of the financial statements. 

(g) Closing of books:

 In this stage of the accounting cycle, the ledger accounts are closed and balanced (also referred to as “zeroed out”) at the end of every accounting period. 

(h) Drafting the Financial Statements:

in the last stage of the accounting cycle, the Income Statement is prepared with the closing balances of the nominal accounts, while the balances of real and personal accounts get reflected in the Balance Sheet. Financial statements are prepared in the following order: Income Statement, Statement of Retained Earnings, Balance Sheet and Statement of Cash Flows.

REAL ME SIRF YE STEPS LIKHNA HAI

STEP 1 TRANSACTIONS

STEP 2] RECORDING ; JOURNAL

STEP 3] CLASSIFICATION ; IN LEDGER

STEP 4] SUMARIZING ; TRADING AC, PNL, AC, BALANCE SHEET

STEP5]INTERPRETTING

STEP 6] COMMUNICATING

Significance of Accounting

Significance of Accounting

1. Helps in Decisions: Provides data to make better financial decisions.
2. Builds Trust: Shows clear and honest financial information.
3. Measures Success: Checks if the business is profitable or not.
4. Follows Laws: Keeps everything legal and organized.
5. Manages Resources: Tracks money and assets to use them wisely.
6. Calculates Taxes: Ensures correct tax payments.
7. Prepares for Audits: Makes financial reviews easier.

Limitations of Accounting

1. Objectives of Accounting

   1. Keep Records: To write down all financial transactions.
   2. Find Profit or Loss: To check how much money is earned or lost.
   3. Know Financial Position: To see the overall health of the business.
   4. Follow Rules: To meet legal requirements.
   5. Share Information: To give financial data to investors, creditors, and others.
   6. Plan Ahead: To help in planning and making business decisions.
   7. Protect Assets: To keep track of and safeguard business property.

Branches of accounting

Let's talk about each of them in details

1. Financial Accounting:

Financial accounting deals with the recording and classifying of a company’s financial transactions, as well as preparing and presenting financial statements for internal and external stakeholders.

While preparing financial statements, strict compliance with generally accepted accounting principles or GAAP needs to be observed. Financial accounting focuses on the analysis of historical data.

2. Management accounting:

Also called managerial accounting, management accounting primarily provides information for use by internal users, that is, the management of the company. Any information used for managerial decision-making forms part of management accounting. This branch of accounting may not strictly comply with GAAP.

Management accounting comprises budgeting and forecasting, cost analysis, financial analysis, evaluation of business decisions and other such areas.

3. Cost Accounting:

Cost accounting is sometimes considered a subset of management accounting. It refers to the recording, presentation and analysis of costs related to manufacturing. This branch of accounting is extremely useful for manufacturing businesses because they typically have very complicated costing processes.

Cost accounting uses various costing techniques, standards and principles that help companies to develop budgets for controlling costs and be cost-effective.