Introduction to Accounting

Economic events are visible in personal, institutional in fact in every sphere of the society. The number of these events is many and diversified. Without the proper technique and its application, it is impossible to know the overall impact of these events. It is only accounting that deals with the overall result and impact of those economic events. Various stakeholders both internal as well as external are keenly interested to know about the information of accounts. Therefore, accounting takes initiatives to record and analyze those transactions and report those to its stakeholders.

Accounting Concepts

Accounting is such a subject by studying which the various financial activities of a person or an institution i.e. expenses paid, receive income, purchase and sale of assets, buying and selling of goods, receive from debtors and pay to creditors etc. are correctly recorded in different books of accounts and determine their actual result after a certain period. In accounting the economic transactions of a business are recorded, classified, and summarized. So, the financial position of a business can be ascertained which will lead towards taking proper decisions. The knowledge of accounting can be used to prepare different types of statement and reports to identify the financial condition of a firm. Therefore, accounting is called the ‘language of business.’ Accounting is that knowledge which helps us to record, classify and summarize the financial transactions that are eventually helpful to determine the overall financial condition of a person or an institution.

Objectives and necessity of accounting

1. Without proper recording of transactions, it is not possible to know the financial condition of a firm. Therefore, the foremost objective of accounting is to record the transactions properly into the books of accounts.

2. One of the main objectives of accounting is to ascertain financial condition and result. It is possible to locate the motion of a business through identifying the profit and loss. Recording all the incomes and expenses properly the profit and loss of a firm can be obtained.

3. The pen picture of financial condition can be seen by calculation the assets, liabilities, and owners equity of a firm.

4. Reducing cost can optimize the objective of a business. Accounting helps to record the expenses properly and thus helps reducing cost.

5. Accounting has no alternatives in controlling the fraud and forgery of a business firm. With proper recording of accounts, we can resist and control fraud and forgery.

6. Helps in informing financial condition to interested group and thus takes correct decision.

7. Financial information of the previous year helps in taking proper steps by making comparative study.

8. Determines the source of internal and external flow of money of various services oriented nonprofit organizations like schools, colleges, hospitals, clubs and societies and ascertain their accounts balance.

9. Govt. accumulates through collecting VAT, duties and taxes and contributes to different regular and development areas. The role of accounting is great in managing smooth functions of govt. Besides, the books of accounts and related documents are useful to a firm in many ways i.e. for bank or taking loan from money lending organization, fixing the sales price of a product, identifying future activities etc. The necessity of accounting is very much essential for keeping a fine, disciplined and a thrifty/frugal life. Without keeping accounts properly, the pros and cons of an organization can never be identified. Keeping records properly ensures cost control and wastage of a firm and thus attain financial solvency.

The origin and evolution of accounting

From the history of civilization people used to keep records of different important events on the bark of trees, by drawing lines on stones in caves. Later they learnt keeping accounts of stocks and stocks by making marks on the walls at home and making knots with the help of creepers. Gradually the number of population increases, society erupts, exchange system developed, currency was introduced, and trade and commerce was initiated. Purchase-sales, income-expenses and other transactions were recorded mathematically. In 1494, an Italian Mathematician wrote a book entitled ‘Summa de Arithmetica, Geometria, Proportioni et Proportionalita’ (The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality) and explained the basic principles of book keeping the double entry system in it.

During the passage of time, progress also occurs in science, technology and in business and as such accounting developed. The stature of business grew from small to large. The use of accounting is visible/ applied in personal and familial life along with commercial, non-commercial, govt. and non-govt., profitable and in non-profitable organizations.

The development of accounting is related to the development of science and technology. Now a day’s accounts are kept in computers rather manually. It saves time and labor as well as helps organization taking desired decision.

Users of accounting information

Accounting is known as an information system. Thinking about the internal and external users of accounting reports and records of transactions are kept and statements are published.

Internal users of accounting

1. Owners and managers: Accountants prepare books of accounts and other necessary documents. The owner as well as manager tries to identify profit and loss and financial condition from this statement. So, future course of action can be ascertained.

External users of accounting

1. Loan/ credit providers: Before granting loans to the recipient organization, the credit providers analyze its financial conditions whether it might be able to pay back the loan or not.

2. Govt.: Authority concerned of the govt. might look into the accounts and check whether organizations pay its rates, taxes, and VAT and for taking necessary measures.

3. Creditors: Before allowing credit sales, the creditors always want to ensure that the recipients are in a financial state of paying back the due amount. This can only be possible by seeing the records of accounts.

4. Workers and officers: Workers and officers of organizations take the assistance of the financial statements to know and have their benefits from the profit of the organization. Besides auditors, investors, consumers and other concerned also use accounting information.

Relation of accounting system with society and environment

Accounting is not merely used for obtaining profit. Apart from making profit, it also contributes towards society and environment so that it is not affected by that. From the following illustrations, some contribution of accounting towards society and environment can be determined:

1. Organizations will contribute towards the resistant of environment pollution and accountant will keep its records. This record will tell us about the consciousness and contribution of that owner towards the society and environment. Especially the oil refinery companies contribute generously towards environment from being polluted.

2. Smoke emitted from industry and factories are injurious towards human and environment. The owner and the accountant spent a lot of money for protecting the environment issues. For this, governments’ rules and regulations must be followed.

3. While producing a product hygiene raw materials are used, less electricity is consumed, the sound of electricity must be at a tolerable limit, and garbage should be dumped in proper places. To ensure these some expenses are to be made. Besides allocating this fund, an accountant must also make proper records of those expenses.

4. Every Business organizations have to spend for society as a part social commitment, such as providing scholarship among poor and meritorious students. For this, accounts are to be kept for proper fund allocation.

Role of accounting in creating sense of value and accountability

Value is the combination of long-term beliefs, thought, concept, and perception that unite a specific standard that helps people accepting the right and ignoring the wrong. Accounting helps creating value perception in the following manner:

1. Exhibit of honesty and responsibility: If accounting methods are followed properly while keeping accounts, corruption, fraud, and misappropriation of assets could be kept under control thus ensuring clarity in keeping accounts.

2. Debt repayment consciousness: Accounting plays a vital role in removing the mentality of becoming a defaulter of loan repayment. Therefore, it instills value perception of not becoming a defaulter.

3. Creating religious sense of value: Proper use of god-gifted resources and reducing unnecessary cost are part of religious value. If accounts are kept properly the concept of, ‘cut your coat according to your cloth’ can be hence practiced in both individual as well as institutional life.

4. Responsibly towards society and state: The main sources of income of govt. are VAT, customs, excise and income tax etc. By utilizing the concept of accounting, accounts are recorded properly hence, the dodging of tax pay tendency reduces.

5. Prevent fraud and forgery: If proper accounts are kept the chances of fraud and forgery among the officers and the staff reduces at a substantial amount. As such, they become cautious of misappropriation of funds and reduce anomalies.

Accounting in accountability

If a specific responsibility is assigned to single person, he will only remain responsible for that job. Remain responsible to third party means accountability. The role of accounting is described in keeping this accountability into action:

a) Internal accountability of the firm: In modern decentralized system, people are empowered for income, expense, and investment so that they may focus and concentrate in accumulating result to their higher authority for answering their various queries.

b) Accountability towards owners, creditors, and investors: People involved in bookkeeping and management of a firm must make sure that the prepared statement gives a clear pen picture of the invested amount; the profit earned is in line with the invested profit. If found otherwise regarding economic accountability there can be a case of great anarchy in every economic and non-economic affair.

c) Accountability towards Govt.: Concerned authorities of the Govt. have legal right to see whether govt. rules are being followed properly or not in industry. They need to see whether govt. tax, VAT, and duties are being paid accordingly. Keeping books of accounts properly ensures such accountability.

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