Accounting: Meaning, objectives and Functions.

 

Meaning of Accounting

Every businessman who was running a business of his own needs the recording of their profits and losses. How much capital did he invest in his business? How much assets he needed to start a business.

Therefore there is a need to keep a specific system of recording, analyzing and keeping a systematic record of all the economic transactions related to its business such as expenses or its income or various transactions a businessman does during a specific year.

 Accounting also helps in giving the result of the activities done by business during the whole year. Accounting makes it easy to give detailed information about all the activities done during the year.  

Therefore it is defined that “accounting is the systematic recording  the various economics transactions related in terms of money. Accounting can be classified both as a science and art.”

Now accounting has various types of characteristic:

(1) Accounting as a science and art: Science is the systematic study if certain accounting principles on which the accounting is done. These principles are to be followed while doing the accounting or recording of the transactions. It is a specified body of knowledge.

 It can be done by the scientific analysis of accounting ; it is not fully scientific as it consists of human behavior.

It can be called an art as it is the art of classifying, analyzing, recording of economic data or transactions. It can show the financial position of the business or where does the company stand in future.

2. Financial transactions recording only: Those transactions which are related to finance or financial statements or can be recorded in money terms. Those transactions are recorded in the accounting process.

Those transactions which are not expressed in money terms are not recorded in accounting. For example starting of a new business by competitors or strike by employees e.t.c.

3. Recording of accounting in money terms: As I told above that accounting can be measured in money terms or can be recorded in money terms.

For example: Sales done by the business of  ₹20000 or purchase done by  ₹500000 or measurement of assets and liabilities in money terms and one more thing that the measure of expenses or income can also be done in money terms. They give immediate information such as Machinery ₹3000, Land ₹7800 Creditors ₹15000 Sundry debtors ₹450000 e.t.c

All the transaction are first recorded in journal but in big or large industries or enterprises recorded  can be done in to various subsidiary books. A businessman records each specific transaction into specific subsidiary books.

 For example (I) Cash transactions in cash book (II) Sales transactions in sales book (III) Purchase transactions in purchase book (IV) Bill payable transactions in bill payable book (V) Bill receivable transactions in bill receivable book (VI) Remaining transaction which are left after recording in this transactions or which are not recorded in any of these subsidiary books are recorded in Journal Proper.

4. Classifying: After recording these transaction, the next step to put these transactions in each and every ledger. Or we can say that there is grouping of various transactions in  their own ledger by making their heads. For this, a separate account has to be created for recording transactions into their own ledger.

For example: For recording sales we have to make a separate account that can be made for sales that can be titled as “sales account”, if we are recording purchases we can make a separate account for purchase or can be denoted as “ purchase account”. Similarly, all other transactions are to be put in a separate account of his own name.

5. Summarizing: Summarising is an art of showing the classified data in an understandable manner. It includes the preparation of trial balance or lastly the final account which is the last step of a sole trader accounting process to be prepared.

Final account still consists of three accounts namely:- (i) Trading account (ii) Profit and loss account (iii) Balance sheet.

Trading account is normally prepared for calculating gross profit or gross loss during the year. Profit & Loss account is prepared for calculating net profit or net loss during the year. Lastly, Balance sheet is prepared for to gain knowledge about the financial position of the company.

Objectives of accounting

1. Keeping the systematic record of transactions: The actual or the main reason for accounting is to make a systematic record of all the economic or business transactions. It helps or protects us by meeting any fraud.

2. Calculation of profit and loss: The main purpose of preparing accounts is to calculate the net profit or loss. For this, Trading,  profit & loss or balance sheet are to be made to know the exact financial position of the company. All the items related to sales, purchase or revenue or various expenses or income. If the expenses are more than income it is said to be Loss or If income is more than expenses it is said to be profit.

3. To show the financial position of the company: For businessman, Profit or loss of the business does not tells the actual state or position where a company stand.

 For this, a Balance sheet has to be prepared which shows the exact position of the company or it shows on which stage the company stands. It has two sides namely (i) Assets and (ii) Liabilities.

 All assets are written or the assets sides or all the liabilities are written on liabilities. The most important thing without which the financial position cannot stand is that liabilities should be equal to assets.

4. To provide information to parties: Another main thing or main objective is to provide necessary information to various parties such as creditors, government, investors, owners and banks e.t.c.

Functions of accounting

1.  Maintaining complete records: Main purpose of making accounts or doing accounts is to keep the record of various activities , post these transaction into ledger, make the trial balance and find the financial position of a company by making final accounts.

2. Saving the assets of business: Another function of accounting is to save the business assets i.e. fixed, tangible assets and non- tangible assets. It enables them to control all the assets of the business.

3. Providing Assistance to the Management: Timely information provide assistance to the management So that, they can do the management functions such as (i) Planning (ii) Organising (iii) Staffing (iv) Directing (v) Controlling easily.

4. Fixing Responsibility: Another important function is to fix the responsibility or authority to the employees as accounting process shows profitability.