INTRODUCTION TO ACCOUNTING
LEARNING OBJECTIVES
- After studying this chapter, student will be able to Describe the meaning, significance, objectives, advantages and limitations of accounting.
- Identify the individuals and entities that use accounting information.
- Explain the various terms used in accounting and differentiate between different related terms.
- According to American institute of certified public accountants, accounting is the art of recording 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.
- Accounting principles board (APB) defined accounting as follows, "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 In simple words, accounting is the process of identifying, recording, classifying, summarizing interpreting and communicating financial information to the users for judgement.
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Open in new tab Objectives of accounting
1. To keep systematic and complete record of business transaction in the books of accounts according to specified principles and rules to avoid the possibility of omissions and fraud.
2. To ascertain the profit earned or loss incurred during a particular accounting period which further help in knowing the financial performance of a business.
3. To ascertain the financial position of the business by means of financial statement ie. balance sheet which shows assets on one side and capital & liabilities on the other side.
4 To provide useful accounting information to users like owners, investors, creditors, banks, employees and government authorities etc who analyse them as per their requirements.
5. To provide financial information to the management which help in decision making, budgeting and forecasting
Introduction to Business
The term Business refers to “the state of being busy”. Every individual is engaged to satisfy human needs. For eg. A labour works in the factory to earn wages and thereby satisfies his needs. Similarly, a farmer engages himself in agricultural activities and an employee works in the office, a teacher teaches in the classroom etc for satisfy his needs, comforts and luxuries.
All the activities of human beings can be broadly classified into two. They are:
- Economic Activities
- Non economic Activities
Economical Activities are the activities a man is engaged in, to earn his livelihood by producing and distributing goods and rendering services.
NON economic activities are those activities that do not result in a payment. In other words the intention of these activities is not to earn money. For e.g., a mother preparing food, serving a child and a housewife rendering domestic services and doing household work are non-economic activities because they are not intended to earning money.
Classification of Economic Activities
Economic activities are broadly classified into three. They are
- Profession
- Employment, and
- Business
1. Profession
Profession is an occupation requiring specialized education. In other sense, profession refers “to a body of people in a learned occupation.” It requires an association with a profesional body for a person to practise. For example, a Chartered Accountants of India (ICAI). A professional renders service of expert nature to his clients for a consulting fee. For e.g., a lawyer is engaged in legal advisory and consulting services for a fee. Similarly, a doctor treats the patients and a Chartered Accountants renders various services to his clients like auditing, tax planning etc., for which he gets paid.
2. Employment
An employment is a contract of service. A person who work under the contract for a salary is called an employee and the person who has given the job to the employee is called employer. An employee work under an agreement as per the rules of service and performs tasks assigned to him by the employer. The relationship between the employer and the employee is that of a ‘Master’ and ‘Servant’.
3. Business
Business is an economic activity involving production, exchange, distribution and sale of goods and services with an objective of making profits.
Business – Meaning and Definitions
1. Etymologically business refers to the state of being busy.
2. The term business is interpreted as one’s regular occupation or profession.
3. It refers to a particular entity company or a corporation. e.g. SBI, Infosys.
4. It also refers to a particular market sector such as automobile business, banking business etc.
5. Business refers to the activities of purchase, sale, manufacture, processing and marketing of goods and services.
6. Finally, the primary intention of business is making profits.
L.H.Haney defined business as “a human activity directed towards producing or acquiring wealth through buying and selling of goods”.
B.O. wheeler “Business is an institution organized and operated to provide goods and services to society under the incentive of private gain”.
Keith and Carlo “Business is a sum of all activities involved in the production and distribution of goods and services for private profits”.
After careful analysis of the above definitions, business may be define as an economic activity which involves regular transfer or exchange of goods or services for a price with an objective of earning profits and acquiring wealth through the satisfaction of human wants. Business creates utilities by producing and selling goods and services to satisfy human wants. Time, place and possession of value are created by business enterprises.