Nature and scope of accounting

Nature and scope of accounting

It involves the set of principles or rules that must be observed in order to achieve an objective view of the accounting results. Accounting in the fullest sense, is therefore the interactive and integrated process of reviewing, forecasting, planning, recording, classifying, reporting , and interpreting the financial activities in the organization. This allows the custodians to make informed judgments and decisions pertaining to the performance and financial position of the organization.

It also facilitate those who may have a vested interest in the business to assess their relationship and expectations from the operations. To this end accounting information should be – Relevant : to the users so as to influence their ability to make informed decision – Reliable : free from material error and bias, giving a artful representation of the firm – Comparable: presented in a consistent manner so at to allow for reasonable comparisons ; understandable: uncomplicated, structured, and clearly presented.

Owners : The accounting system enables those who have an invested interest in the business to make an overview of the performance, as well to determine the results of their investment. Investors Others who have contributed to the business, either by way of financial assistance, supply of goods, or any other form of involvement, need to analyses the levels of profitability and risk involved in the equines Government : Assessment of the business operations by the government may be done for tax purposes, or to determine national income, or other statistical calculation.

Trade Union : Collective bargaining on the behalf of employees by the trade union can only be done beneficially if the union has a clear understanding of the financial position of the firm. DIVISIONS OF ACCOUNTING In order to satisfy the users of the accounting information, the accounting process may be sub-divided into broad categories : Cost and Management Accounting : This aspect of accounting is unconcerned with the supply of information to the internal users, I,e, to the managers and the decision makers. It includes such activities as product costing, budgeting, systems operations, and accounting methods.

This allow the users to formulate plans, set policies, make decisions, and control the operations in the organization. – Financial Accounting: This is the maintenance of the accounting records in a methodical manner and the preparation of summarized statements regarding the results of the business. This is of use primarily to parties external to the business, and gives an indication of the level of profitability ND financial position of the business. Special Reports : Some business operations may be financed or regulated by a parent organization.

Thus the information compiled by the business unit should only relate to the activities of that enterprise. The Historical Cost Concept: Resources should be maintained in their accounts at their original cost, not at the periodically revised or market value. Adjustments to the cost, e. G. Depreciation, should therefore be shown in a separate account. The accumulative effect of these accounts may be determined when the balance sheet is being prepared. The Going Concern Concept: It is assumed that the business unit will continue for a lasting period during which time it will be able to fulfill its objectives. Thus, interim liquidated values are not shown when preparing the balance sheet.

This assumption would not apply if the firm’s continued existence can not be established by fact, e. G. If faced with a legal injunction, anticipating liquidation, on the expiration off contract, or in the event of a buyout or takeover. The Money Measurement Concept: Accounting transactions and the summary of their results can only be measured in monetary units. Thus, those activities or situations that are not measurable in a monetary sense would not be reflected in the accounts. These include the firm’s industrial relations, management styles, or industry position. The net value of these tuitions, however, may be classified as goodwill when the firm is being re- valued, or being sold as a going concern.

The Accrual Concept: Revenue and expenses must be accounted for during the period when they occurred, and not necessarily when they were honored. Thus, income is calculated from revenue and expenses incurred, not from those actually paid for. The Dual Aspects Concept: There are two aspects to every accounting transaction, one shows the gains realized and the other represents the claims that may be made against these gains. From this concept comes the double entry principle, I. E. Or every debit (Dry) entry there must be a corresponding credit (Cry) entry. The Realization Concept : Income is regarded as being earned at the point when the legal property, or the claim, in goods has passed from the seller to the buyer.

This may be different from the point when the order was received, the delivery was made, or payment completed. This, however, is determined by the terms of contract. The Materiality Concept: On-going accounts are only maintained for those items or activities that by themselves will make a significant impact on the business. These are called assets or liabilities. Immaterial or complementary items or activities are written off as expense or revenue at the end of each accounting period. The Prudence Concept: Accounting systems should allow for the reporting of the minimum value of income. Thus, total expenses include non-cash items such as depreciation, bad debts, and other provisions.

The Substance Over Form Concept: The benefits from, or material substance of a resource should take precedence over the legal form of ownership. Thus, the firm may be in possession of an asset that is being used in the business but which has not yet being paid for. For example, an equipment may have been bought on hire purchase or acquired by way of a lease, and as such the asset does not legally belong to the firm until it is paid for. However, the material substance of the equipment must be shown in the books, and this takes precedence over the legal form in it. The Time Interval or Periodicity Concept: The firm should prepare a set of final accounts in order to take a reading of its performance and financial standing from time to time.

This is required although the business is regarded as a going concern. This periodic reading of the business allows management to exercise informed assessment and control over the affairs of the business. The Full-Disclosure Concept: Although the financial statements are concerned with the last accounting period, it should also take into consideration any future events that may have an impact on the firm’s financial position. Thus a disclosure should be made for eventualities such as a pending lawsuit, on-going negotiations for sales, disposal, acquisition or take-over, or changes in the accounting methods being used. These disclosures are usually listed as explanatory footnotes.

The Objectivity Concept: The accounting transactions recorded in the firm’s kooks should be supported by objective evidence or by a basis of origin in fact. This includes such documentation as sales invoices, payment vouchers, cash receipts etc. Thus there should be a basis by which the transactions can be verified. This is usually required whenever an audit is being done. The Consistency Concept: The methods that are used in the recoding and reporting Of accounting transactions should be unchanged over the course Of the business, unless it is governed by some new rule or mode of operations. Changes result in a distortion of profit, thus objective comparison or analysis would not be allowed.

Please follow and like us:
Haven’t found the essay you want?