Accounting is the art of recording, classifying and summarising the economic information 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 results thereof.
➢ Functions of Accounting
1) Identifying: The first step in accounting is to determine what to record, i.e., to identify
the financial events which are to be recorded in the books of accounts. It involves
observing all business activities and selecting those events or transactions which can be
considered as financial transactions.
2) Recording: A transaction will be recorded in the books of accounts only it is considered
as an economic event and can be measured in terms of money. Once the economic events
are identified and measured in economic terms they will be recorded in the books of
accounts in monetary terms and in chronological order.
3) Classifying: Once the financial transactions are recorded in journal or subsidiary books,
all the financial transactions are classified by grouping the transactions of one nature at
one place in a separate room.
4) Summarising: It is concerned with presentation of data and it begins with balance of
ledger accounts and the preparation of trial balance with the help of such balances.
5) Communication: The main purpose of accounting is to communicate the financial
information the users who analyse them as per their individual requirements. Providing
financial information to its users is a regular process.
➢ Objectives of Accounting
1) To keep systematic and complete records of financial transactions in the books of
accounts according to specified principles and rules to avoid the possibility of omission
2) To ascertain the profit earned or loss incurred during a particular accounting period
which further help in knowing the financial performance of a business.
3) To ascertain the financial position of the business by the means of financial statement i.e.
balance sheet which shows assets on one side and Capital & Liabilities on the other side.
4) To provide useful accounting information to users like owners, investors, creditors,
banks, employees and government authorities etc who analyze them as per their
5) To provide financial information to the management which help in decision making,
budgeting and forecasting.
6) To prevent frauds by maintaining regular and systematic accounting records.
➢ Advantages of Accounting
1) It provides information which is useful to management for making economic decisions.
2) It helps owners to compare one year’s results with those of other years to locate the
factors which leads to changes.
3) It provides information about the financial position of the business by means of balance
sheet which shows assets on one side and Capital & Liabilities on the other side.
4) It helps in keeping systematic and complete records of business transactions in the books
of accounts according to specified principles and rules, which is accepted by the Courts
5) It helps a firm in the assessment of its correct tax Liabilities such as income tax, sales tax,
VAT, excise duty etc.
6) Properly maintained accounts help a business entity in determining its proper purchase
➢ Limitations of Accounting
1) It is historical in nature; it does not reflect the current worth of a business. Moreover, the
figures given in financial statements ignore the effects of changes in price level.
2) It contains only those information’s which can be expressed in terms of money. It ignores
qualitative elements such as efficiency of management, quality of staff, customer’s
3) It may be affected by window dressing i.e. manipulation in accounts to present a more
favorable position of a business firm than its actual position.
4) It is not free from personal bias and personal judgment of the people dealing with it. For
example, different people have different opinions regarding life of asset for calculating
depreciation, provision for doubtful debts etc.
5) It is based on various concepts and conventions which may hamper the disclosure of
realistic financial position of a business firm. For example, assets in balance sheet are
shown at their cost and not at their market value which could be realised on their sale.
➢ Book Keeping – The Basis of Accounting
Book keeping is the record-making phase of accounting which is concerned with the
recording of financial transactions and events relating to business in a significant and
orderly manner. Book Keeping should not be confused with accounting. Book keeping is
the recording phase while accounting is concerned with the summarizing phase of an
Difference between Accounting and Book Keeping
➢ Types of accounting information
Accounting information can be categorized into following:
1) Information relating to profit or loss i.e. income statement, shows the net profit of
business operations of a firm during a particular accounting period.
2) Information relating to Financial position i.e. Balance Sheet. It shows assets on one side
and Capital & Liabilities on the other side. Schedules and notes forming part of balance
sheet and income statement to give details of various items shown in both of them.
➢ Subfields/Branches of Accounting
1) Financial Accounting: It is that subfield/Branch of accounting which is concerned with
recording of business transactions of financial nature in a systematic manner, to ascertain
the profit or loss of the accounting period and to present the financial position of the
2) Cost Accounting: It is that Subfield/Branch of accounting which is concerned with
ascertainment of total cost and per unit cost of goods or services produced/ provided by a
3) Management Accounting: It is that subfield/Branch of accounting which is concerned
with presenting the accounting information in such a manner that help the management in
planning and controlling the operations of a business and in better decision making.
➢ Qualitative Characteristics of Accounting Information
Accounting information is useful for interested users only if it poses the following
1) Reliability: Means the information must be based on facts and be verified through source
documents by anyone. It must be free from bias and errors.
2) Relevance: To be relevant, information must be available in time and must influence the
decisions of users by helping them to form prediction about the outcomes.
3) Understandability: The information should be presented in such a manner that users can
understand it well.
4) Comparability: The information should be disclosed in such a manner that it can be
compared with previous year’s figures of business itself and other firm’s data.