ORIGIN AND GROWTH OF ACCOUNTING

ORIGIN AND GROWTH OF ACCOUNTING 

Accounting is as old as money itself. However, the act of accounting was not as developed as it is today because, in the early stages of civilization, the number of transactions to be recorded was so small that each businessman was able to record and check for himself all his transactions.





Accounting was practiced in India twenty three centuries ago as is clear from the book named "Arthashastra" written by Kautilya, King Chandragupta's minister. This book not only relates to politics and economics but also explain the art of proper keeping of accounts. However, the modern system of accounting based on the principles of double entry system owes its origin to Luco Pacioli who first published the principles of Double Entry System in 1494 at Venice in Italy. Thus, the art of accounting has been practiced for centuries but it is only in the late thirties that the study of the subject 'accounting' has been taken up seriously.

ACCOUNTING CONVENTIONS

 ACCOUNTING CONVENTIONS 

1. Convention of Materiality. 

Materiality concept states that items of small significance need not be given strict theoretically correct treatment. Infact, there are many events in business which are insignificant in nature. The cost of recording and showing in financial statement such events may not be well justified by the utility derived from that information. For example, an ordinary calculator costing Rs. 100 may last for ten years. However, the effort involved in allocating its cost over the ten year period is not worth the benefit that can be derived from this operation. The cost incurred on calculator may be treated as the expense of the period in which it is purchased. Similarly, when a statement of outstanding debtors is prepared for sending to top management, figures may be rounded to the nearest ten or hundred.

2. Convention of Conservatism. 

This concept requires that the accountants must follow the policy of ‘’playing safe” while recording business transactions and events. That is why, the accountant follow the rule anticipate no profit but provide for all possible losses, while recording the business events. This rule means that an accountant should record lowest possible value for assets and revenues, and the highest possible value for liabilities and expenses. According to this concept, revenues or gains should be recognised only when they are realised in the form of cash or assets (i.e. debts) the ultimate cash realisation of which can be assessed with reasonable certainty. Further, provision must be made for all known liabilities, expenses and losses, Probable losses regarding all contingencies should also be provided for. ‘Valuing the stock in trade at market price or cost price whichever is less’, ‘making the provision for doubtful debts on debtors in anticipation of actual bad debts’, ‘adopting written down value method of depreciation as against straight-line method’, not providing for discount on creditors but providing for discount on debtors’, are some of the examples of the application of the convention of conservatism.

3. Convention of Consistency. 

The convention of consistency requires that once a firm decided on certain accounting policies and methods and has used these for some time, it should continue to follow the same methods or procedures for all subsequent similar events and transactions unless it has a sound reason to do otherwise. In other worlds, accounting practices should remain unchanged from one period to another. For example, if depreciation is charged on fixed assets according to straight line method, this method should be followed year after year. Analogously, if stock is valued at ‘cost or market price whichever is less’, this principle should be applied in each subsequent year.

ROLE OF ACCOUNTING

ROLE OF ACCOUNTING

 Accounting plays an important and useful role by developing the information for providing answers to many questions faced by the users of accounting information :

(1) How good or bad is the financial condition of the business? 

(2) Has the business activity resulted in a profit or loss ? 

(3) How well the different departments of the business have performed in the past? 

(4) Which activities or products have been profitable? 

(5) Out of the existing products which should be discontinued and the production of which commodities should be increased? 

(6) Whether to buy a component from the market or to manufacture the same? 

(7) Whether the cost of production is reasonable or excessive? 

(8) What has been the impact of existing policies on the profitability of the business? 

(9) What are the likely results of new policy decisions on future earning capacity of the business? (10) In the light of past performance of the business how should it plan for future to ensure desired results? 

Above mentioned are few examples of the types of questions faced by the users of accounting information. These can be satisfactorily answered with the help of suitable and necessary information provided by accounting. 

Besides, accounting is also useful in the following respects : 

(a) Increased volume of business results in large number of transactions and no businessman can remember everything. Accounting records obviate the necessity of remembering various transactions. 

(b) Accounting records, prepared on the basis of uniform practices, will enable a business to compare results of one period with another period. 

(c) Taxation authorities (both income tax and sales tax) are likely to believe the facts contained in the set of accounting books if maintained according to generally accepted accounting principles. 

(d) Accounting records, backed up by proper and authenticated vouchers, are good evidence in a court of law. 

(e) If a business is to be sold as a going concern, then the values of different assets as shown by the balance sheet helps in bargaining proper price for the business.

BRANCHES OF ACCOUNTING

BRANCHES OF ACCOUNTING 

To meet the ever-increasing demands made on accounting by different interested parties such as owners, management, creditors, taxation authorities etc., the various branches have come into existence. There are as follows :

1. Financial accounting. The object of financial accounting is to ascertain the results (profit or loss) of business operations during the particular period and to state the financial position (balance sheet) as on a date at the end of the period. 

2. Cost accounting. The object of cost accounting is to find out the cost of goods produced or services rendered by a business. It also helps the business in controlling the costs by indicating avoidable losses and wastes. 

3. Management accounting. The object of management accounting is to supply relevant information at the appropriate time to the management to enable it to make decisions and effect control. 

In this lesson, we are concerned only with financial accounting. Financial accounting is the oldest and other branches have developed from it. The objects of financial accounting, as stated above, can be achieved only by recording the financial transactions in a systematic manner according to a set of principles. The art of recording financial transactions and events in a systematic manner in the books of account is known as book-keeping. However, a mere record of transactions is not enough. The recorded information has to be classified, analyzed and presented in a manner in which business results and financial position can be ascertained.

NATURE OF ACCOUNTING

NATURE OF ACCOUNTING 

The various definitions and explanations of accounting have been propounded by different accounting experts from time to time and the following aspects comprise the nature of accounting :

i) Accounting as a service activity 

       Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, in making reasoned choices among alternative courses of action. It means that accounting collects financial information for the various users for taking decisions and tackling business issues. Accounting in itself cannot create wealth though, if it produces information which is useful to others, it may assist in wealth creation and maintenance. 

(ii) Accounting as a profession 

    Accounting is very much a profession. A profession is a career that involve the acquiring of a specialised formal education before rendering any service. Accounting is a systematized body of knowledge developed with the development of trade and business over the past century. The accounting education is being imparted to the examinees by national and international recognised the bodies like The Institute of Chartered Accountants of India (ICAI), New Delhi in India and American Institute of Certified Public Accountants (AICPA) in USA 7 etc. The candidate must pass a vigorous examination in Accounting Theory, Accounting Practice, Auditing and Business Law. The members of the professional bodies usually have their own associations or organisations, where in they are required to be enrolled compulsorily as Associate member of the Institute of Chartered Accountants (A.C.A.) and fellow of the Institute of Chartered Accountants (F.C.A.). In a way, accountancy as a profession has attained the stature comparable with that of lawyer, medicine or architecture. 

(iii) Accounting as a social force 

      In early days, accounting was only to serve the interest of the owners. Under the changing business environment the discipline of accounting and the accountant both have to watch and protect the interests of other people who are directly or indirectly linked with the operation of modern business. The society is composed of people as customer, shareholders, creditors and investors. The accounting information/data is to be used to solve the problems of the public at large such as determination and controlling of prices. Therefore, safeguarding of public interest can better be facilitated with the help of proper, adequate and reliable accounting information and as a result of it the society at large is benefited. 

(iv) Accounting as a language 

     Accounting is rightly referred the "language of business". It is one means of reporting and communicating information about a business. As one has to learn a new language to converse and communicate, so also accounting is to be learned and practised to communicate business events. A language and accounting have common features as regards rules and symbols. Both are based and propounded on fundamental rules and symbols. In language these are known as grammatical rules and in accounting, these are 8 termed as accounting rules. The expression, exhibition and presentation of accounting data such as a numerals and words and debits and credit are accepted as symbols which are unique to the discipline of accounting. 

(v) Accounting as science or art 

      Science is a systematized body of knowledge. It establishes a relationship of cause and effect in the various related phenomenon. It is also based on some fundamental principles. Accounting has its own principles e.g. the double entry system, which explains that every transaction has two fold aspect i.e. debit and credit. It also lays down rules of journalising. So we can say that accounting is a science. Art requires a perfect knowledge, interest and experience to do a work efficiently. Art also teaches us how to do a work in the best possible way by making the best use of the available resources. Accounting is an art as it also requires knowledge, interest and experience to maintain the books of accounts in a systematic manner. Everybody cannot become a good accountant. It can be concluded from the above discussion that accounting is an art as well as a science. 

(vi) Accounting as an information system 

     Accounting discipline will be the most useful one in the acquisition of all the business knowledge in the near future. You will realise that people will be constantly exposed to accounting information in their everyday life. Accounting information serves both profit-seeking business and non-profit organisations. The accounting system of a profit-seeking organisation is an information system designed to provide relevant financial information on the resources of a business and the effect of their use. Information is relevant and valuable if the decision makers can use it to evaluate the financial consequences of various alternatives. 9 Accounting generally does not generate the basic information (raw financial data), rather the raw financial data result from the day to day transactions of the business. 

    As an information system, accounting links an information source or transmitter (generally the accountant), a channel of communication (generally the financial statements) and a set of receivers (external users)

DISTINCTION BETWEEN ACCOUNTING AND ACCOUNTANCY

DISTINCTION BETWEEN ACCOUNTING AND ACCOUNTANCY'

Although in practice Accountancy and Accounting are used interchangeably yet there is a thin line of demarcation between them. The word Accountancy is used for the profession of accountants - who do the work of accounting and are knowledgeable persons. Accounting is concerned with 6 recording all business transactions systematically and then arranged in the form of various accounts and financial statements. And it is a distinct discipline like economics, physics, astronomy etc. The word accounting tries to explain the nature of the work of the accountants (professionals) and the word Accountancy refers to the profession these people adopt.

MEANING OF ACCOUNTING

MEANING OF ACCOUNTING 

The main purpose of accounting is to ascertain profit or loss during a specified period, to show the financial condition of the business on a particular date and to have control over the firm's property. Such accounting records are required to be maintained to measure the income of the business and communicate the information so that it may be used by managers, owners and other interested parties. Accounting is a discipline which records, classifies, summarises and interprets financial information about the activities of a concern so that intelligent decisions can be made about the concern. The American Institute of Certified Public Accountants has defined the Financial Accounting as "the art of recording, classifying and summarising in as the significant manner and in terms of money transactions and events which in part, at least of a financial character, and interpreting the results thereof". American Accounting Association defines accounting as "the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information. From the above the following attributes of accounting emerge :

(i) Recording: It is concerned with the recording of financial transactions in an orderly manner, soon after their occurrence In the proper books of accounts.
(ii) Classifying: It Is concerned with the systematic analysis of the recorded data so as to accumulate the transactions of similar type at one place. This function is performed by maintaining the ledger in which different accounts are opened to which related transactions are posted.
(iii) Summarising: It is concerned with the preparation and presentation of the classified data in a manner useful to the users. This function involves the 5 preparation of financial statements such as Income Statement, Balance Sheet, Statement of Changes in Financial Position, Statement of Cash Flow, Statement of Value Added.
(iv) Interpreting: Nowadays, the aforesaid three functions are performed by electronic data processing devices and the accountant has to concentrate mainly on the interpretation aspects of accounting. The accountants should interpret the statements in a manner useful to action. The accountant should explain not only what has happened but also (a) why it happened, and (b) what is likely to happen under specified conditions.