Lecture Notes: Meaning and Scope of Accounting

Introduction to Accounting

• Definition: Accounting is the language of business.
• Transactions and Events:
  • Transaction: Performance of an act.
  • Event: Result of a transaction, e.g., closing stock remaining, year-end profit or loss.
  • Unique Case: Purchase or sale of a fixed asset is considered both a transaction and an event.

Functions of Accounting (According to APB)

• Recording
• Classifying: Ledger preparation
• Summarizing: Creating final accounts, trial balance, P&L, balance sheet
• Analyzing and Interpretation: Financial position analysis and report creation
• Communicating to End Users

Objectives of Accounting

• Systematic recording of transactions
• Determining financial results and position
• Providing information for decision-making
• Understanding company’s solvency position

Historical Facts

• Stewardship Accounting: Origin of accounting
• Double Entry System: Invented in the 15th century, Father of Accounting: Luca Pacioli

Functions and Uses of Accounting

• Measurement: Performance evaluation
• Forecasting: Future prediction
• Decision Making: Aids management
• Comparison and Evaluation: Between companies
• Control: Identifying system weaknesses
• Government Regulation and Taxation

Limitations of Accounting

• Not fully exact due to estimations
• Does not record qualitative aspects
• Can be manipulated (Window Dressing)

Fields of Accounting

• Management Accounting: Decision making
• Cost Accounting: Product cost determination
• Social Reporting Accounting: Social costs and benefits
• Human Resource Accounting: Employee value reporting

Users of Accounting Information

• Internal: Owners, management
• External: Creditors, banks, government, public, researchers

Qualitative Characteristics of Accounting Information

• Relevance
• Reliability
• Understandability
• Comparability

Relationship to Other Fields

• Economics, Statistics, Law, Mathematics, Management

Role of Accountant

• Statutory and internal audit
• Taxation
• Management consultancy
• Secretarial work

Bookkeeping vs Accounting

• Bookkeeping: Focus on recording, routine nature
• Accounting: Preparation of financial statements

Accounting Standards

• Set by ICAI in India
• Objectives: Ensure comparability, transparency, consistency
• Limitations: Cannot override law, rigidity, multiple treatments

International Accounting Standards

• IFRS: International standards
• Indian Accounting Standards: Converge with IFRS

Importance of Accounting Principles

• Concepts: Assumptions like going concern, consistency, accrual
• Conventions: Established practices

Types of Assumptions and Principles

• Assumptions: Going concern, consistency, accrual
• Principles: Business entity, money measurement, periodicity, matching
• Cost Concept: Assets recorded at cost
• Realization Concept: Recognize revenue when earned
• Materiality: Importance of information
• Full Disclosure: Complete information sharing
• Conservatism: Record anticipated losses, not gains

Contingent Assets and Liabilities

• Contingent Asset: Potential future benefits, typically ignored unless certain
• Contingent Liability: Possible future obligations, categorized as probable, reasonably possible, remote

Accounting Policies

• Selection Criteria: Prudence, materiality, substance over form

Measurement in Accounting

• Principles: Historical cost, current cost, realizable value, present value
• Process: Identification, selection, evaluation

Capital and Revenue

• Capital Expenditure: Long-term benefits, increases assets
• Revenue Expenditure: Short-term, recurring, P&L debit
• Capital Receipts: Increase liabilities
• Revenue Receipts: Routine income, P&L credit

Chapter Review

• Recent exam questions focus on distinctions between assumptions and policies, advantages of accounting standards, and concept explanations.

This summary captures the key points from the lecture on the meaning and scope of accounting, highlighting the essential topics and concepts for understanding the basics of accounting.