Lecture Notes: Meaning and Scope of Accounting

Introduction

• Accounting Definition: Language of business.
• Key Terms:
  • Transaction: Performance of an act.
  • Event: Result of a transaction, such as closing stock or profit/loss at year's end.

Types of Transactions

• Daily Transactions: Buying or selling goods, investments, expenses.
• Special Case: Purchase or sale of fixed assets is both a transaction and an event.

Functions of Accounting

• Defined by the Accounting Principles Board (APB):
  1. Recording: Initial entry of transactions.
  2. Classifying: Organizing transactions into ledgers.
  3. Summarizing: Preparing final accounts like trial balance, P&L, balance sheet.
  4. Analyzing and Interpreting: Evaluating financial positions and reports.
  5. Communicating: Sharing results with users.

Objectives of Accounting

1. Systematic recording of transactions.
2. Determining financial results and position.
3. Providing accurate information for decision-making.
4. Assessing company solvency.

History and Evolution of Accounting

• Began with stewardship accounting.
• Double-entry system developed in the 15th century by Luca Pacioli.

Uses of Accounting

1. Measurement: Evaluating past performance.
2. Forecasting: Predicting future trends.
3. Decision Making: Assisting management.
4. Comparison and Evaluation: Between companies.
5. Control: Identifying operational weaknesses.
6. Government Regulations and Taxation: Calculating tax liabilities.

Limitations of Accounting

1. Not fully exact due to estimations.
2. Does not record qualitative aspects.
3. Potential for window dressing, i.e., manipulating records to show higher profits.

Specialized Fields of Accounting

• Management Accounting: Assists in decision-making.
• Cost Accounting: Determines product cost.
• Social Reporting Accounting: Reports social costs/benefits.
• Human Resource Accounting: Valuing employees as assets.

Users of Accounting Information

• Internal Users: Owners, management (access to internal information).
• External Users: Creditors, banks, government, researchers, public.

Qualitative Characteristics of Accounting Information

1. Relevance
2. Reliability
3. Understandability
4. Comparability

Relationship with Other Fields

• Economics, Statistics, Law, Mathematics, Management.

Role of Accountants

• Statutory and internal audits, taxation, management consultancy, secretarial work, etc.

Bookkeeping vs. Accounting

• Bookkeeping: Recording transactions, done by junior staff, regular and repetitive.
• Accounting: Preparing financial statements, broader scope.

Accounting Standards

• Purpose: Ensure uniformity and comparability in accounting practices.
• Issued by ICAI in India.
• Benefits: Eliminate non-comparability, maintain transparency and consistency.

Limitations of Accounting Standards

1. Cannot override the law.
2. May lead to rigidity.
3. Choices between different treatments can be problematic.

Global Convergence

• IFRS and Indian Accounting Standards: Convergence to align local standards with international ones, aiding international business and investments.

Accounting Principles

• Concepts: Going concern, consistency, accrual.
• Conventions: Assumptions and practices.
• Important Concepts:
  • Business Entity
  • Money Measurement
  • Periodicity
  • Matching Principle
  • Cost and Realization Concepts
  • Materiality and Full Disclosure
  • Revenue Recognition
  • Dual Aspect and Conservatism

Contingent Assets and Liabilities

• Expectations based, not real; depend on future uncertain events.
• Contingent Assets: Ignored unless virtually certain.
• Contingent Liabilities: Recorded if probable.

Capital and Revenue

• Capital Expenditure/Receipts: Long-term benefits, increases assets or reduces liabilities.
• Revenue Expenditure/Receipts: Short-term, recurring, affects P&L.

These notes summarize the fundamental concepts, roles, and limitations of accounting as discussed in the lecture, providing a structured overview for study and review.