Lamar Van Dusen - Objectives of Accounting

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OBJECTIVES OF ACCOUNTING
Lamar Van Dusen
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TOPICS COVERED

• What is Business?
• Forms of Business
• Parties Interested in Business
• Defining Accounting
• Objectives of Accounting
• Functions of Accounting
• Branches of Accounting
• Accounting Concepts Conventions

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CONTENTS

• Process of Accounting
• Financial Statements
• Important Terminology
• Usefulness of Accounting for Managers
• Recent Trends in Accounting

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BUSINESS

• Business is a form of activity involving
  production and purchase of goods with the object
  of selling a profit.
• Producing and selling at profit is essential to
  constitute a business.
• The term business also includes the performance
  of services for others on payments.

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FORMS OF BUSINESS

• Sole Proprietor
• Partnership
• Company or Corporation
• Every business whether small or large
• has the basic objective to see whether
• the money invested is efficiently utilized
• or not.

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PARTIES INTERESTED IN BUSINESS

• Owner or Shareholder
• Managers
• Creditors
• Banks, Financial Institutions
• Prospective Investors
• Government
• Employees
• Society
• Researchers
• All these parties are interested in the
  Financial
• position of the organisation in order to take
• decisions.

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ACCOUNTING

• Accounting is a language of business.
• The basic objective of language is to communicate
  the results of business operations to various
  parties
• Business must know-
• What is owns?
• What he owes?
• Whether it has earned a profit or loss on
  account of running a business?
• What is financial position i.e. will it be able
  to meet all his commitments in the near future
  ?
• Accounting provides the answer of all these
  questions

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DEFINING ACCOUNTING

• Accounting is a process of recording,
  classifying
• and summarizing in a significant and in terms
  of
• money, transactions and events which are, in
  part,
• at least of financial character and
  interpreting
• results thereof ---- AICPA (1941)
• Accounting may be defined as the process of
• recording, classifying, summarizing, analyzing
  and interpreting the financial transactions and
  communicating the results thereof to the parties
  interested in such information.

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OBJECTIVES OF ACCOUNTING

• To maintain the records of business transaction
• Calculation of Profit or Loss
• Depiction of financial position
• To make information available to various groups
  and users.
• To facilitate rational decision making.

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FUNCTIONS OF ACCOUNTING

• Recording
• Only transactions that have financial character
  are recorded.
• Recording is done in the book JOURNAL
• Classifying
• Grouping of transactions of similar nature at
  one place i.e LEDGER

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FUNCTIONS OF ACCOUNTING

• Summarizing
• It involves presenting the classified data in
  a manner which is understandable and useful to
  the internal as well as external users of
  accounting statements.
• Trial Balance
• Income Statement
• Balance Sheet
• Deals with financial transactions
• Only financial transactions are recorded in the
  books of accounts.
• Analysis and Interpretation
• It helps the management to judge the
  performance of the business operations and for
  preparing future plans.

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• Communicating Results
• Accounting information so analyzed and
  interpreted has to be communicated in a proper
  form and manner to the proper person. This is
  done through distribution of accounting reports
• Making Information more Reliable
• This is done by use of internationally accepted
  accounting standards

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BRANCHES OF ACCOUNTING

• Financial Accounting
• Cost Accounting
• Management Accounting

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FINANCIAL ACCOUNTING

• The accounting system concerned only with the
  state of affairs and financial results of
  operations is called Financial Accounting.
• It Includes ascertainment of profit earned or
  loss incurred and position of business at the end
  of accounting period and providing financial
  information required by the management and other
  parties interested.
• The basic objective of accounting is to present
  TRUE FAIR view of the affairs of the company.

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COST ACCOUNTING

• The basic limitation of financial accounting is
  that it fails to provides the information
  relating to the cost of individual products.
• Cost Accounting deals with this problem
• The main purpose of cost accounting has been to
  analyze the expenditure involved so as to
  calculate the cost of various products
  manufactured and fix their price.
• It also helps in cost control.

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MANAGEMENT ACCOUNTING

• The branch of accounting which provides
  necessary information to management for decision
  making is called management accounting.
• The Input for management accounting is from
  financial accounting and cost accounting.

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ACCOUNTING PRINCIPLES

• Accounting is termed as language of business. As
  in case of language there are set of rules which
  are adopted for communication same is the case
  with accounting also.
• Are those rules of action or conduct which are
  adopted by accountant universally while recording
  accounting transactions.
• These principles are of two types
• Accounting Concepts
• Accounting Conventions

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ACCOUNTING CONCEPTS

• Concepts includes those basic assumptions or
  conditions upon which the science of accounting
  is based.
• Separate Entity Concept
• Going Concern Concept
• Money Measurement Concept
• Cost Concept
• Dual Aspect Concept
• Accounting Period Concept
• Matching Concept (Periodic matching of Cost and
  Revenue)
• Realization Concept

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CONVENTIONS

• Are those customs or traditions which guide the
  accountant while preparing the accounting
  statements.
• Convention of Conservatism
• Convention of Full Disclosure
• Convention of Consistency
• Convention of Materiality

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ACCOUNTING PROCESS

• Financial Transactions
• Recording- Journal
• Classifying Ledger
• Summarizing and
• Analysis and Interpretation

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FINANCIAL STATEMENTS

• Financial Statements are the end product of
  financial accounting
• Financial Statements includes-
• Profit and Loss Account (Income Statement)
• Balance Sheet

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PROFIT LOSS ACCOUNT

• It is also know as Income Statement, Statement
  of earnings, Statement of operations
• Profit and loss account is a flow statement that
  portrays the operations over/during a particular
  time period.
• It reports the profit or loss earned by a
  business unit out of its activities during a
  particular period.
• It is generally prepared after the end of
  financial year i.e. Accounting year

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BALANCE SHEET

• A Statement which sets out the assets and
  liabilities of a firm or an institution as at a
  certain date.
• It is statement which reports the property values
  owned by the enterprise and the claims of the
  creditors and owner against these properties.
• It is prepared with a view to measure the True
  financial position of a business concern at a
  particular point of time.

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IMPORTANT TERMS

• Assets
• It denotes the economic resources (property) of a
  business and includes all current and fixed
  assets
• Fixed Assets are those that are acquired for
  continued use and not meant for resale. They may
  be tangible like land, buildings, plant and
  machinery, furniture etc. or Intangible like
  patents, goodwill etc.
• Current Assets are those assets which are kept
  temporarily for resale or for converting into
  cash. Stock, Cash in Hand, Debtors etc.

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• Liabilities
• It denotes all claims against the assets of the
  business and include those of the outsider or
  those of the owner of the business.
• Liabilities may include the followings-
• Owner's Fund
• Long term Liabilities or Fixed liabilities
• Current Liabilities

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• Debtors
• Are the persons or parties who are liable to pay
  to the business on account of credit sales.
• Creditors
• Are the persons or parties to whom business is
  liable to pay on account of credit purchases.
• Capital
• Total interest of the owner or owners in the
  business is called. It is sometime called as
  owners fund
• Revenue
• The income that accrues to the firm by the sale
  of goods/services/assets or by supply of the
  firms resources to others.

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• Expense
• It is the amount spent in order to produce and
  sell the goods and services which produce the
  revenue. Payment of wages, rent, salaries etc.
• Purchase
• The term purchase is used only for the purchase
  of goods. Goods are those which are purchased for
  resale or for the production of finished goods
  which are also meant for sale.
• Sale
• The term sale is used for the sale of goods
  only. It includes both credit as well as cash
  sale.
• Stock
• - Goods lying unsold on a particular date.

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USEFULNESS OF ACCOUNTING FOR MANGERS

• Planning
• Performance Evaluation (Controlling)
• Decision Making
• Communication

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RECENT TRENDS IN ACCOUNTING

• Human Resource Accounting
• Inflation Accounting
• Social Accounting
• Kaizen Costing
• ABC Costing
• Target Costing

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• THANK YOU