Introduction to Financial Accounting: definition, professional bodies, nature, history.

Accounting

Introduction

Accounting is a systematic process of recording, classifying, measuring,interpreting and communicating financial data of an organization to enable users make decision. It incorporates measurement and reporting of profit and loss. It reveals profit or loss for a given period and the value and the nature of a firm’s assets and liabilities and owners’ equity.

On this note, an Accountant must not only be interested in record keeping alone but in the application of his professional competency or knowledge and skill in presenting accounting information to assist management decision making.

In other words, accounting is a practice and body of knowledge concerned primarily with;

• Method for recording transactions,
• Keeping a financial record,
• Performing internal audit
• Reporting and analyzing financial information to the management and
• Advising on taxation matters.

Definitions of Accounting

Some prominent definitions of accounting to help us better understand the meaning of basic accounting.

• According to the Committee of Terminology of American Institute of Certified Public Account:” Accounting is the art of recording, classifying summarising in a significant manner and in terms of money, transaction, and events which are, in part at least of a financial character and interpreting the results thereof.”
• According to Bierman and Drebin:” Accounting may be defined as identifying, measuring, recording and communicating of financial information.”

Therefore accounting can be defined as” the process of recording, summarising, reporting and analyzing required financial information relating to the economic events of an organization to the interested users for making decisions.”

Book Keeping versus Accounting

Book keeping is the systematic recording of transactions n a daily basis in the appropriate books. It is an integral part of accounting while Accounting is concerned with the use to which the book keeping records are put as well as the analysis and interpretation.

Components of Basic Accounting

1. Recording

The primary function of accounting is to make records of all transactions that the firm enters into. For the purpose of recording, the accountant maintains a set of books. Their procedures are very systematic. Nowadays, the computer has been deployed to automatically account for transactions as they happen.

2. Summarising

Recording of transactions creates raw data. Sentences of road 8000 of little used to in organization for decision making. Pages and pages of raw data are of little use to an organization for decision making. For this reason, the accountant classifies data into categories.

3. Reporting

Management is answerable to the investors about the company’s state of affairs. The operations that are being financed with the money of owners, it needs to be periodically updated to them. For this reason, there are periodic reports annually summarising the performance of all four quarters which are sent to them.

In the form of financial statements reporting is done. To ensure that there is no misleading financial reporting, these financial statements are also regulated by government bodies.

4. Analyzing

Lastly, accounting entails conducting an analysis of the result. After results have been summarised and reported, a meaningful conclusion needs to be drawn. Management must find out its positive and negative points. Accounting helps in doing so by means of comparison. It is common factors to compare profit, cash, sales, and assets, etc. with each other to analyze the performance of the business.

Thus accounting is a language of business. It communicates the performance of the business with various end-users who are interested to know about the business. Accounting provides quantitative information of financial nature to both management and other users so that they can take a proper decision about the business.

NATURE OF ACCOUNTING

The various definitions and explanations of accounting has been
propounded by different accounting experts from time to time and the following
aspects comprise the nature of accounting :
i) Accounting as a service activity
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. It means that accounting collects financial information for the various users for taking decisions and tackling business issues.
Accounting in itself cannot create wealth though, if it produces information which is useful to others, it may assist in wealth creation and maintenance.
(ii) Accounting as a profession
Accounting is very much a profession. A profession is a career that involve the acquiring of a specialised formal education before rendering any service. Accounting is a systematized body of knowledge developed with the
development of trade and business over the past century. The accounting education
is being imparted to the examinees by national and international recognised the
bodies like The Institute of Chartered Accountants of India (ICAI), New Delhi in
India and American Institute of Certified Public Accountants (AICPA) in USA

Is Accounting Science or Art?

Expert’s opinion differs on the issue of whether accounting is a science or an art. Some considered accounting is as science and some others as art. It is not made very clear by the definition or the meaning of accounting either.

Science means a systematic body of knowledge which is based on definite rules and principles and establishes is the relationship between cause and effect. On the other hand, Art is a technique that helps in achieving the desired goals in the best possible manner.

Accounting As a Science

Accounting has its own principles holes and techniques. On the basis of these principles of injections recorded systematically in order to know the results of a business. That’s why it is regarded as a science.

Accounting As an Art

Every businessman records a business transaction in the books of accounts as per rules, according to the nature of the business and determine the results after analyzing, so it’s an art. Thus it is clear from the above discussion that accounting has the elements of both science and art.

History of Accounting

There is no accurate record as to when accounting started, but available information suggests that record keeping is as old as man. The starting point can be linked to the merchants in Babylonian and Assyrian civilization, about 4000 years BC.

The early development of accounting is closely related to developments in writing , counting and money and early auditing systems by the ancient Egyptians and Babylonians . By the time of the Roman Empire, the government had access to detailed financial information.

In India Chanakya wrote a manuscript similar to a financial management book, during the period of the Mauryan Empire . His book “Arthashasthra” contains few detailed aspects of maintaining books of accounts for a Sovereign State.

The Italian Lucia Pacioli, recognized as The Father of accounting and bookkeeping was the first person to publish a work on double-entry bookkeeping, and introduced the field in Italy.

The modern profession of the chartered accountant originated in Scotland in the nineteenth century. Accountants often belonged to the same associations as solicitors, who often offered accounting services to their clients. Early modern accounting had similarities to today’s forensic accounting. Accounting began to transition into an organized profession in the nineteenth century, with local professional bodies in England merging to form the Institute of Chartered Accounting in England and Whales in 1880.