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    Financial Accounting: Definitions

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    pranjal kalita
    This document provides definitions and explanations of key concepts in accounting, including: - Bookkeeping is the art of recording business transactions in a set of books. It forms the basis for accounting by providing primary records. - Financial accounting is the art of recording, classifying, summarizing and interpreting business transactions and events in monetary terms. It identifies transactions to record based on financial impact and interprets results through statements. - Cost accounting is a branch dealing with classifying, recording and reporting current and prospective costs to help managers make decisions and control costs. It relates costs to products/services. - Management accounting provides financial and cost information to managers within an organization to facilitate decision making, planning, and control

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    Financial Accounting: Definitions

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    pranjal kalita
    29 views3 pages
    This document provides definitions and explanations of key concepts in accounting, including: - Bookkeeping is the art of recording business transactions in a set of books. It forms the basis for accounting by providing primary records. - Financial accounting is the art of recording, classifying, summarizing and interpreting business transactions and events in monetary terms. It identifies transactions to record based on financial impact and interprets results through statements. - Cost accounting is a branch dealing with classifying, recording and reporting current and prospective costs to help managers make decisions and control costs. It relates costs to products/services. - Management accounting provides financial and cost information to managers within an organization to facilitate decision making, planning, and control

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    This document provides definitions and explanations of key concepts in accounting, including: - Bookkeeping is the art of recording business transactions in a set of books. It forms the basis for accounting by providing primary records. - Financial accounting is the art of recording, classifying, summarizing and interpreting business transactions and events in monetary terms. It identifies transactions to record based on financial impact and interprets results through statements. - Cost accounting is a branch dealing with classifying, recording and reporting current and prospective costs to help managers make decisions and control costs. It relates costs to products/services. - Management accounting provides financial and cost information to managers within an organization to facilitate decision making, planning, and control

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    29 views3 pages

    Financial Accounting: Definitions

    Uploaded by

    pranjal kalita
    This document provides definitions and explanations of key concepts in accounting, including: - Bookkeeping is the art of recording business transactions in a set of books. It forms the basis for accounting by providing primary records. - Financial accounting is the art of recording, classifying, summarizing and interpreting business transactions and events in monetary terms. It identifies transactions to record based on financial impact and interprets results through statements. - Cost accounting is a branch dealing with classifying, recording and reporting current and prospective costs to help managers make decisions and control costs. It relates costs to products/services. - Management accounting provides financial and cost information to managers within an organization to facilitate decision making, planning, and control

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    FINANCIAL ACCOUNTING

    the bank maintains for us. It tracks each rupee that we deposit or withdraw from our account. When we go to
    supermarket to buy something, the cashier at the counter will record things we buy and give us a ‘bill’ or ‘cash
    memo’. These are source documents prepared for the transaction between the supermarket and us. While these
    are simple examples, there could be more complex business activities. A good working knowledge of keeping
    records is therefore necessary. Professional accounting bodies all over the world have been functioning with the
    objective of providing this body of knowledge. These institutions are engaged in imparting training in the field of
    accounting. Let us start with some basic definitions, concepts, conventions and practices used in development of
    this art as well as science.
    Definitions
    In order to understand the subject matter with clarity, let us study some of the definitions which depict the scope,
    content and purpose of Accounting. The field of accounting is generally sub-divided into:
    (a) Book-keeping
    (b) Financial Accounting
    (c) Cost Accounting and
    (d) Management Accounting
    Let us understand each of these concepts.
    (a) Book-keeping
    The most common definition of book-keeping as given by J. R. Batliboi is “Book-keeping is an art of recording
    business transactions in a set of books.”
    As can be seen, it is basically a record keeping function. One must understand that not all dealings are, however,
    recorded. Only transactions expressed in terms of money will find place in books of accounts. These are the
    transactions which will ultimately result in transfer of economic value from one person to the other. Book-keeping
    is a continuous activity, the records being maintained as transactions are entered into. This being a routine and
    repetitive work, in today’s world, it is taken over by the computer systems. Many accounting packages are
    available to suit different business organizations.
    It is also referred to as a set of primary records. These records form the basis for accounting. It is an art because, the
    record is to be kept in such a manner that it will facilitate further processing and reporting of financial information
    which will be useful to all stakeholders of the business.
    (b) Financial Accounting
    It is commonly termed as Accounting. The American Institute of Certified Public Accountants defines Accounting
    as “an art of recoding, 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 results thereof.”
    The first step in the cycle of accounting is to identify transactions that will find place in books of accounts.
    Transactions having financial impact only are to be recorded. E.g. if a businessman negotiates with the customer
    regarding supply of products, this will not be recorded. The negotiation is a deal which will potentially create a
    transaction and will have exchange of money or money’s worth. But unless this transaction is finally entered into,
    it will not be recorded in the books of accounts.
    Secondly, the recording of the business transactions is done based on the Golden Rules of accounting (which
    are explained later) in a systematic manner. Transaction of similar nature are grouped together and recorded
    accordingly. e.g. Sales Transactions, Purchase Transactions, Cash Transactions etc. One has to interpret the
    transaction and then apply the relevant Golden Rule to make a correct entry thereof.
    Thirdly, as the transactions increase in number, it will be difficult to understand the combined effect of the same
    by referring to individual records. Hence, the art of accounting also involves the step of summarizing them. With
    the aid of computers, this task is simplified in today’s accounting world. The summarization will help users of the
    business information to understand and interpret business results.
    Lastly, the accounting process provides the users with statements which will describe what has happened to the
    business. Remember the two basic questions we talked about, one to know whether business has made profit or
    loss and the other to know the position of resources that are used by the business.
    It can be noted that although accounting is often referred to as an art, it is a science also. This is because it is
    based on universally applicable set of rules. However, it is not a pure science as there is a possibility of different
    interpretation.

    2 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA


    Fundamentals of Accounting

    (c) Cost Accounting


    According to the Chartered Institute of Management Accountants (CIMA), Cost Accountancy is defined as
    “application of costing and cost accounting principles, methods and techniques to the science, art and practice
    of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of
    managerial decision-making.”
    It is a branch of accounting dealing with the classification, recording, allocation, summarization and reporting
    of current and prospective costs and analyzing their behaviours. Cost Accounting is frequently used to facilitate
    internal decision making and provides tools with which management can appraise performance and control costs
    of doing business. It primarily involves relating the costs to the different products produced and sold or services
    rendered by the business. While Financial Accounting deals with business transactions at a broader level, Cost
    Accounting aims at further breaking it up to the last possible level to indentify costs with products and services. It
    uses the same Financial Accounting documents and records. Modern computerized accounting packages like
    ERP systems provide for processing Financial as well as Cost Accounting records simultaneously.
    This branch of accounting deals with the process of ascertainment of costs. The concept of cost is always applied
    with reference to a context. Knowledge of cost concepts and their application provide a very sound platform for
    decision making. Cost Accounting aims at equipping management with information that can be used for control
    on business activities.
    (d) Management Accounting
    Management Accounting is concerned with the use of Financial and Cost Accounting information to managers
    within organizations, to provide them with the basis in making informed business decisions that would allow them to
    be better equipped in their management and control functions. Unlike Financial Accounting information (which,
    for public companies, is public information), Management Accounting information is used within an organization
    (typically for decision-making) and is usually confidential and its access available only to a selected few.
    According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is “the
    process of identification, measurement, accumulation, analysis, preparation, interpretation and communication
    of information used by management to plan, evaluate and control within an entity and to assure appropriate
    use of and accountability for its resources. Management Accounting also comprises the preparation of financial
    reports for non management groups such as shareholders, creditors, regulatory authorities and tax authorities”.
    Basically, Management Accounting aims to facilitate management in formulating strategies, planning and
    constructing business activities, making decisions, optimal use of resources, and safeguarding assets of business.
    These branches of accounting have evolved over years of research and are basically synchronized with the
    requirements of business organizations and all entities associated with them. We will now see what are they and
    how accounting satisfies various needs of different stakeholders.
    Difference between Book-keeping and Accountancy:
    The Significant difference between Book-keeping and Accountancy are:

    Sl Points of Book Keeping Accountancy


    No. difference
    1. Meaning Book-keeping is considered as end. Accountancy is considered as
    beginning.
    2. Functions The primary stage of accounting function is The overall accounting functions are
    called Book-keeping. guided by accountancy.
    3 Depends Book-keeping can provide the base of Accountancy depends on Book-
    Accounting. keeping for its complete functions.
    4. Data The necessary data about financial Accountancy can take its decisions,
    performances and financial positions are prepare reports and statements from the
    taken from Book-keeping. data taken from Book-keeping.
    5. Recording of Financial transactions are recorded on the Accountancy does not take any principles,
    Transactions basis of accounting principles, concepts concepts and conventions from Book-
    and conventions. keeping.

    THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 3


    FINANCIAL ACCOUNTING

    Difference between Management Accounting and Financial Accounting:


    The significant difference between Management Accounting and Financial Accounting are:

    Management Accounting Financial Accounting


    1. Management Accounting is primarily based on 1. Financial Accounting is based on
    the data available from Financial Accounting. the monetary transactions of the enterprise.
    2. It provides necessary information to the 2. Its main focus is on recording and classifying
    management to assist them in the process of monetary transactions in the books of accounts
    planning, controlling, performance evaluation and preparation of financial statements at the end
    and decision making. of every accounting period.
    3. Reports prepared in Management Accounting are 3. Reports as per Financial Accounting are meant for
    meant for management and as per management the management as well as for shareholders and
    requirement. creditors of the concern.
    4. Reports may contain both subjective and objective 4. Reports should always be supported by relevant
    figures. figures and it emphasizes on the objectivity of data.
    5. Reports are not subject to statutory audit. 5. Reports are always subject to statutory audit.
    6. It evaluates the sectional as well as the entire 6. It ascertains, evaluates and exhibits the financial
    performance of the business. strength of the whole business.

    Accounting Cycle
    When complete sequence of accounting procedure is done which happens frequently and repeated in same
    directions during an accounting period, the same is called an accounting cycle.

    Recording of
    Transaction

    Financial
    Journal
    Statement

    Closing
    Ledger
    Entries

    Adjusted Trial Trial


    Balance Balance

    Adjustment
    Entries

    Accounting Cycle

    Steps/Phases of Accounting Cycle


    The steps or phases of accounting cycle can be developed as under:
    (a) Recording of Transaction: As soon as a transaction happens it is at first recorded in subsidiary book.
    (b) Journal: The transactions are recorded in Journal chronologically.

    4 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

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