Accounting Basics- Meaning, Objectives, Advantages

Hi Friends,  today we study about the the topic Accounting Basics- Meaning, Objectives, Advantages. We discuss each and every thing in detail about Accounting like the definition of Accounting, Objectives of Accounting, Advantages and Disadvantages of Accounting. So Lets start today's blog-

What is Accounting?  

Accounting is concerned with recording of the financial transactions(which can be measured in terms of money), summarizing them and communicating financial information to the users. Similarly, Accounting is the process of systematically recording, measuring and communicating information about financial transactions to the users.

We learn:-

• Meaning and Definition of Accounting

• Accounting Process

• Characteristics of Accounting

• Objectives of Accounting

• Advantages  of Accounting

• Limitations of Accounting

Meaning and Definition of Accounting

• Accounting is concerned with recording of the financial transactions(which can be measured in terms of money), summarizing them and communicating financial information to the users, or

• Accounting is the process of collecting the financial transactions, recording, summarizing and communicating the  financial information to the users.

• According to American Accounting Association, Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.

By this we understand that accounting is that process in which the first step is,  we collect or identify those business transactions or events which can be measured in terms of money, secondly we have to record those transactions which we identified earlier, then we classify and summarize each recorded transactions, then we Analyse and interpret our results based on recording and lastly when the results are out we communicate the result of financial information to the users.

The term Identifying,  Recording, Classifying, Summarizing, Analyzing and Communicating are accounting process. All consists different theory and principles. After the completion of basic terms and concepts we come along to the full accounting process.

👉Also read Difference between Bookkeeping and Accounting.

From the above definition we said that accounting process is the combination of six steps:-

1. Identifying Financial Transactions
2. Recording
3. Classifying
4. Analysing and Interpretation
5. Communication

Is Accounting Process and  Characteristics of Accounting are same?

Let's see

Characteristics of Accounting

1. Identification of Financial Transactions and Events

Accounting can only done for those transactions and events which are financial in nature or can be measured in monetary terms, for Example- Purchase of Furniture by a firm, sale of material etc. If we say Raju is a very hardworking employee, this cannot be measured in monetary terms because it is quantitative in nature, hence it is not recorded in the books of accounts.

    2. Measuring the Identified transactions

As per the Accounting process,  transactions and events recorded are measured in terms of money. For Example- Purchase of  100 Lunch Boxes for Rs 15,000/- and 200 Bottles for Rs 20,000/-. It means Total purchase is Rs 35,000/- that can be measured in terms of money.

   3. Recording

Recording is the process of recording the financial business transactions in the books of original entry named i.e, Journal

   4. Classifying

Classification of transactions involves the process of collecting similar transactions at one place or combining the similar account transactions in one account named i.e, Ledger. Ledger book contains individual account heads under which all the financial transaction of a similar nature are recorded. For Example- in Reema's account ledger , all the business transactions related to Reema are posted, by this we get a clear statement of Reema which shows all the balances wheather payable or due.

  5. Summarising

This process present the summary of all the business transactions which is understandable and useful to the users. Following accounts must be prepared for summarising the business transactions after classifying:-

• Trial Balance
• Trading and Profit & Loss Account(in case of companies only)
• Balance sheet(also known as Final Account or Financial Statement)

 

6. Analysis and Interpretation

Analysis, reviewing helps in planning for growth in future. Financial Statement is analysed or interpreted so that users make a meaningful and fair judgement of the financial position of the business.

 7. Communicating

Accounting can be done for determining the financial position of the business, so that we present the results of the business to its users on time by which decisions are taken at the right time and the appropriate action can be taken.

So, by these characteristics we say that accounting process includes accounting characteristics and this is also the best way to learn.

Objectives of Accounting

1. Recording of Financial Transactions & Events- The main objective of accounting is to record the financial transactions and events as per the accounting principles and concepts in a systematic manner.

2. Determine Profit or Loss- Second objective is to determine the profit earned or loss incurred by the business for the financial year. Financial statements are prepared at the end of the financial year to know the financial performance

3. Determine the financial position- Financial position of the business is determined by its Balance Sheet and it is as relevant for the users of financial statements as is the Income Statement.

4. Assisting the Management- After determining the financial position of business, the management also require to know about the position for further decision making, budgeting, forecasting and exercising control.

5. Communicating to Users- Providing accounting information to its users is one of the main objective of accounting. So that they get to know the liquidity of business for further requirements.

6. Protecting Business Assets- Another objective of accounting is to have record of Assets owned by the business which enables the management to protect them and exercise control.

👉Also read Systems of Accounting and Accounting Information system

Advantages of Accounting

1. Financial Information about Business- By accounting we get to know the financial position of business weather it is Profit or Loss at the end of the accounting period because accounting process includes summarising in which we prepare the final accounts of business.

2. Assistance to Management- At the end of the year when Financial position was disclosed, the management makes business plans, take strong decisions, exercises control over the affairs and effort more to run the business smoothly on the basis of accounting information.

3. Helps in Comparing-  Final results of business helps a businessman to compare the results of current year to previous financial years and lead to change significant factors , if any.

4. Facilitate Loans- Loan is granted by the banks and financial institutions on the basis of growth potential which is supported by the business performance. Accounting makes available the information with respect to performance.

5. Court Evidence- Systematic record of transactions year after year is often accepted by the courts as a good evidence.

6. Facilitates Sale of Business- If someone want to sell his business, the accounts maintained by him will enable to ascertain the proper purchase price.

7. Helps in Decision making- Accounting helps in large number of decision making like how many units are purchased during this year as compared to sales, how much amount is liable to pay and how much is bound to receive and many more.

Limitations of Accounting

1. Accounting is not fully exact- Those transactions which are recorded on the basis of evidence or receipt are totally exact if there is no calculation mistake like bills of sale and purchase but some estimates are made for ascertaining profit or loss and it has no proper bill like- depreciation on asset calculated on the useful life of assets, possible bad debts etc.

2. Accounting Ignores the Qualitative elements- Accounting only deals with monetary transactions, qualitative elements like quality, honesty, hard-working of employees are ignored.

3. Accounting does not indicates the Realisable value- The Final Account(Balance Sheet) does not show the amount which the firm is realised after the sale of assets. This is because many assets are not for the purpose of sale, they are meant for use and are shown at cost less depreciation that may have been written off.

4. Accounting Ignores the effect of Price Level changes- Accounting transactions are recorded at historical cost. But, money(as a measurement unit) changes in value time to time, it does not remain stable. So, accounting information will not show true financial results.

5. Accounting may lead to Window Dressing- Window dressing means manipulating the accounts and show the financial statements in such a way which shows the better position than what is actually is. In this situation final accounts fails to provide the true & fair view of the enterprise.

One more thing don't be get confused in Accounting and Accountancy, both are different terms because Accountancy is a systematic knowledge of Accounting, Accountancy educates how to maintain the books of accounts and how to summarise the accounting information and communicate it to the relevant users.

So, I hope you will understand all these concepts related to Accounting and Accounting Basics so it is fine when we say Accounting may be influenced by the personal judgement. Different accounts are maintained by the accountants to reach the results about the financial and economical position of the business and various process are being performed by accountants to reach the results, so the accounting information must be factual and verifiable

Hope you have got the accounting definition and  accounting basics concepts, if you have any doubts and queries about this topic then please stay tuned on comment section.