The Three Different Definitions of ACCOUNTING

There are three different definitions of ACCOUNTING. These are:

1.) According to ACCOUNTING STANDARDS COUNCIL (ASC):

It is a service activity. it's function is to provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be useful in making economic decisions.

2.) According to AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA):

Accounting is an art or recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events which are in part at least of a financial character and
interpreting the results thereof.

3.) According to AMERICAN ACCOUNTING ASSOCIATION (AAA):

Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgment and decision by users of the information.

Nature of Accounting Standards:

On the basis of forgoing discussion we can say that accounting standards are guide, dictator,
service provider and harmonizer in the field of accounting process.

(i) Serve as a guide to the accountants:

Accounting standards serve the accountants as a guide in the accounting process. They provide
basis on which accounts are prepared. For example, they provide the method of valuation of
inventories.

(ii) Act as a dictator:

Accounting standards act as a dictator in the field of accounting. Like a dictator, in some areas
accountants have no choice of their own but to opt for practices other than those stated in the
accounting standards. For example, Cash Flow Statement should be prepared in the format
prescribed by accounting standard.

(iii) Serve as a service provider:

Accounting standards comprise the scope of accounting by defining certain terms, presenting
the accounting issues, specifying standards, explaining numerous disclosures and
implementation date. Thus, accounting standards are descriptive in nature and serve as a
service provider.

(iv) Act as a harmonizer:

Accounting standards are not biased and bring uniformity in accounting methods. They remove
the effect of diverse accounting practices and policies. On many occasions, accounting
standards develop and provide solutions to specific accounting issues. It is thus clear that
whenever there is any conflict on accounting issues, accounting standards act as harmonizer
and facilitate solutions for accountants.

Functions of Accounting:

Modern Accounting operates within a broad socio-economic environment, and so, the
knowledge required of the accountant cannot be sharply compartmentalized. It is therefore,
difficult to discuss one area without relating to other areas of knowledge. We place a great
emphasis on the conceptual knowledge. The accountant should not only know but he should
understand.
From the above it is clear that no define accounting as such, is rather difficult. Many
accountants have defined Accounting in very many languages.
However we can consider the following definition:
1.H.Chakravorty: “Accountancy is the science of recording, classifying and summarizing
transactions so that relation with outsiders is exactly determined and result of operation during a
particular period can be calculated, and the financial position as the end of the period may be
shown.
2.A.I.C.P.A.: "Accountancy may be defined as the art of recording, classifying and summarizing
in a significant manner and in terms of money, transactions and events, which are in part, at
least of financial character, and interpreting the results thereof".
3.Taylor and Shearing: "Accounting may be defined as the art and science of recording
business transactions in a methodological manner so as to show: (a) the true state of affairs of a
business of a particular period of time and, (b) the surplus or deficiency which has accrued
during a specific period."
It appears from the above analysis,that Accounting is basically concerned with recording of the
business transactions, designing the types of records to be maintained, preparing the reports on
the basis of those recorded data and transactions and interpreting those reports.Finally,
Accounting is concerned with Communication of the results of the recorded transactions in the
form of Final Accounts consisting of the Profit and Loss Account with different sections and the
Balance Sheet with a number of reports and statements affixed at the end.Thus, the following
are the main functions of Accounting:
1.Record Keeping: Accounting is to maintain systematic and chronological record of financial
transactions and to post them subsequently to the various Ledger Accounts and finally to
prepare the Final Accounts to find out the profit or loss of the business at the end of the
Accounting Period.
2.Protecting of Properties: Accounting is to calculate the correct amount of Depreciation on
Assets by choosing the appropriate Method applicable to any particular assets. any
unauthorized dissipation of any asset will bring the business to the threshold of
insolvency.Accounting is to design a desirable system to protect the properties and assets of
the business from unauthorized and unwarranted use.
3.Communication of Results: Accounting is always to communicate the results of the recorded
and transactions to the different parties who are interested in the particular business, i.e.,
properties, investors, creditors, employees, Govt.official and researchers etc.
4.Meeting Legal Requirements: Accounting is to devise and develop such a system of keeping
record and reporting the results as will always meet and legal requirements to enable the
proprietor or the authority to file various statements like Income-Tax Returns, Sales-Tax Returns
etc.
After careful consideration of the above Analysis, it can be stated that Accounting Functions
can be sharply divided into two distinct departments:
A.Historical or Stewardship Function:
This part relates to the past transactions of the business firm, Accounting records, classifies,
reports, analyses and interprets the transactions already effected.Accounting also calculates the
profit or loss made during the year and prepares other financial statements and the statement of
Assets and Liabilities or the Balance Sheet and reports and results to the proprietors, managers
and other interested parties.

B.Managerial Function:
Accounting is to render such service to the management as to aid different levels of the
managerial staff to carry out the operations of the business efficiently.Accounting is to present
"information in such a way as to assist management in the creation of policy and in the day to
day operation of an undertaking".-M.E.Murphy, Managerial Accounting.
Accounting is an advisory service function and is concerned with furnishing such information to
the management as will facilitate efficient planning, operational control and coordination of
future activities of the enterprise. Thus, Accounting is to "assist management in establishing a
plan for reasonable economic objectives and in making of rational decisions"-Haynes and
Massic, Management Analysis

So we see that Accounting helps in Budgetary Control, Cost Control, Material Control and
Operational Control and also in minimizing wastage, losses and errors and frauds.

What is the purpose of accounting?

The purpose of accounting is to accumulate and report on financial information about the
performance, financial position, and cash flows of a business. This information is then used to
reach decisions about how to manage the business, or invest in it, or lend money to it.

This information is accumulated in accounting records with accounting transactions, which are
recorded either through such standardized business transactions as customer invoicing or
supplier invoices, or through more specialized transactions, known as journal entries .

Once this financial information has been stored in the accounting records, it is usually compiled
into financial statements, which include the following documents:

Income statement
Balance sheet
Statement of cash flows
Statement of retained earnings
Disclosures that accompany the financial statements
Financial statements are assembled under certain sets of rules, known as accounting
frameworks, of which the best known are Generally Accepted Accounting Principles (GAAP)
and International Financial Reporting Standards (IFRS). The results shown in financial
statements can vary somewhat, depending on the framework used. The framework that a
business uses depends upon which one the recipient of the financial statements wants. Thus, a
European investor might want to see financial statements based on IFRS, while an American
investor might want to see statements that comply with GAAP.

The accountant may generate additional reports for special purposes, such as determining the
profit on sale of a product, or the revenues generated from a particular sales region. These are
usually considered to be managerial reports, rather than the financial reports issued to
outsiders.

Thus, the purpose of accounting centers on the collection and subsequent reporting of financial
information.

What are the main objectives of Accounting?

by Bipin Das | category Accounting

The following are the main objectives of accounting:

To keep systematic records:

Accounting is done to keep a systematic record of financial transactions. In the absence of

accounting there would have been terrific burden on human memory which in most cases would
have been impossible to bear.

To protect business properties:

Accounting provides protection to business properties from unjustified and unwarranted us. This
is possible on account of accounting supplying the information to the manager or the proprietor.
To ascertain the operational profit or loss:

Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the
business. This is done by keeping a proper record of revenues and expenses of a particular
period. The profit and loss account is prepared at the end of a period and if the amount of
revenue for the period is more than the expenditure incurred in earning that revenue, there is
said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss.

To ascertain the financial position of business:

The profit and loss account gives the amount of profit or loss made by the business during a
particular period. However, it is not enough. The businessman must know about his financial
position i.e., where he stands; what he owes and what he owns? This objective is served by the
balance sheet or position statement.

To facilitate rational decision making:

Accounting these days has taken upon itself the task of collection, analysis and reporting of
information at the required points of time to the required levels of authority in order to facilitate
rational decision making.

Users of Accounting Information

Users of accounting information

1. External users
2. Internal users

External users of accounting information

External users include

Investors
Creditors
Customers
Suppliers
Employees
Government organizations
Internal users of accounting information

Internal users include

Management
Managers of operations

Financial accounting for external users

Financial accounting provides information for external users.

Financial accounting information is used for decision making by external users, such as
investors and creditors.

Managerial accounting for internal users

Managerial accounting provides information for internal users.

Managerial accounting information is used for decision making by internal users, such as the
management or operational managers.

Decisions by external users

Examples

1. To buy or sell the shares of the entity

2. To loan money to the entity
3. To have sales or purchase transactions with the entity
4. To impose taxes

Decisions by internal users

Examples

1. To analyze the profitability by products and operational units

2. To decide the need for cash flows to support the operations
3. To decide whether to buy or sell business segments
4. To decide whether to build new production facilities

Accounting related organizations

Securities and Exchange Commission (SEC)

http://www.sec.gov

Financial Accounting Standards Board (FASB)

http://www.fasb.org/home

International Accounting Standards Board (IASB)

http://www.iasb.org

American Institute of Certified Public Accountants (AICPA)

http://www.aicpa.org

What is the difference between accounting and bookkeeping?

A common question is whether there is any difference between accounting and bookkeeping.
We will begin with bookkeeping, since it is essentially a subset of the larger topic of accounting.
Bookkeeping is the recordation of basic accounting transactions, such as:

Issuing invoices to customers

Recording invoices from suppliers
Recording cash receipts from customers
Paying suppliers
Recording changes in inventory
Processing payroll
Processing petty cash transactions

These transactions are mechanical in nature; that is, the bookkeeper follows a prescribed set of
procedures on a repetitive basis to record a common activity. These common bookkeeping
tasks are entirely adequate for the accounting needs of a small business.

A bookkeeper could compile financial statements from the transactions just described. However,
those financial statements would be incorrect to some extent, because they would not include
the following additional actions that are usually handled by an accountant:

Accruing or deferring expenses

Accruing or deferring revenue
The broader field of accounting includes the use of these accruals. In addition, accounting
encompasses the following activities:

Creating the chart of accounts

Setting up the general ledger
Designing the financial statements
Issuing customized management reports to address specific issues
Altering the classification or recordation of transactions to meet certain accounting standards
Creating a budget and comparing it to actual results
Compiling tax returns from the financial information
Creating a set of controls within which the financial system operates
Designing a record keeping, archiving, and document destruction system
Usually, there is at least one trained accountant responsible for the accounting operations of a
medium to large-sized business, and who sets up the procedures that are then followed by a
larger number of bookkeepers.

In short, the difference between accounting and bookkeeping is that bookkeeping focuses on
repetitive business transactions, and so is a subset of the much larger set of tasks that can be
encompassed by accounting.

There are also significant differences between the bookkeeper and accountant positions. The
bookkeeper role is broad-based, with one person typically handling all of the accounting
transactions for a small business. The bookkeeper tends to be very experienced, but is more
likely to be lacking in formal accounting training. A bookkeeper with a great deal of responsibility
may be referred to as a full-charge bookkeeper. Conversely, the accountant is more likely to
work exclusively on a specific area, such as fixed assets or the general ledger, and is more
likely to have formal training in the accounting function. There is also a career path for
accountants, which leads to the assistant controller and controller positions.

What is bookkeeping

What is bookkeeping?

Bookkeeping involves the process of recording, analysing and interpreting the financial
transactions of a business or individual. The discipline of bookkeeping accounts for a large
proportion of the accounting process.

image:
http://www.firstclassaccounts.com.au/wp-content/uploads/2014/08/Glasses-Financials-Calculato
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Glasses-Financials-Calculator-300x199A bookkeeper’s duty is to set up financial statements so

that an accountant can easily perform legal and tax management in a timely manner.

A skilled and compliant bookkeeper should be able to produce financial records that give
business accurate information about its financial activities. These records are critical to the
future success of any business. Not only are these records necessary for the business, they are
also required by law. Australian legislation states that businesses must have up to date financial
records to ensure that they pay all necessary taxes and levies.

Charts-300x199Records must be kept that are accurate and true for a period of at least 5 years
from the date that the documents were prepared, obtained or the transaction completed,
whichever occurs the latest. Some records, such as payroll, must be kept for a minimum of 7
years.

A good contract bookkeeper is able to:

Set up accounting systems and software properly

Enter transactions
Perform checks, reconciliations and end of year processes
Ensure they are up to speed with legislative requirements and management reports
Undertake payroll duties and compliance
Prepare BAS returns, as a registered BAS agent or under the supervision of a registered BAS
agent
Provide general business administrative support

Accounting & Auditing

Accountants and auditors are responsible for detecting and deterring fraud by evaluating
accounting systems for weaknesses, designing and monitoring internal controls, determining the
degree of organizational fraud risk, interpreting financial data for unusual trends, and following
up on fraud indicators.
Branches of accounting
Accounting can be divided into several areas of activity. These can certainly overlap and they
are often closely intertwined. But it's still useful to distinguish them, not least because
accounting professionals tend to organize themselves around these various specialties.

Financial Accounting
Financial accounting is the periodic reporting of a company's financial position and the results of
operations to external parties through financial statements, which ordinarily include the balance
sheet (statement of financial condition), income statement (the profit and loss statement, or
P&L), and statement of cash flows. A statement of changes in owners' equity is also often
prepared. Financial statements are relied upon by suppliers of capital - e.g., shareholders,
bondholders and banks - as well as customers, suppliers, government agencies and
policymakers. (To learn more on this read, What You Need To Know About Financial
Statements.)

There's little use in issuing financial statements if each company makes up its own rules about
what and how to report. When preparing statements, American companies use U.S. Generally
Accepted Accounting Principles, or U.S. GAAP. The primary source of GAAP is the rules
published by the FASB and its predecessors; but GAAP also derives from the work done by the
SEC and the AICPA, as well standard industry practices. (For more on this see, What is the
difference between the IAS and GAAP?)

Management Accounting
Where financial accounting focuses on external users, management accounting emphasizes the
preparation and analysis of accounting information within the organization. According to the
Institute of Management Accountants, it includes "…designing and evaluating business
processes, budgeting and forecasting, implementing and monitoring internal controls, and
analyzing, synthesizing and aggregating information…to help drive economic value."

A primary concern of management accounting is the allocation of costs; indeed, much of what
now is considered management accounting used to be called cost accounting. Although a
seemingly mundane pursuit, how to measure cost is critical, difficult and controversial. In recent
years, management accountants have developed new approaches like activity-based costing
(ABC) and target costing, but they continue to debate how best to provide and use cost
information for management decision-making.

Auditing
Auditing is the examination and verification of company accounts and the firm's system of
internal control. There is both external and internal auditing. External auditors are independent
firms that inspect the accounts of an entity and render an opinion on whether its statements
conform to GAAP and present fairly the financial position of the company and the results of
operations. In the U.S., four huge firms known as the Big Four - PricewaterhouseCoopers,
Deloitte Touche Tomatsu, Ernst & Young, and KPMG - dominate the auditing of large
corporations and institutions. The group was traditionally known as the Big Eight, contracted to
a Big Five through mergers and was reduced to its present number in 2002 with the meltdown
of Arthur Andersen in the wake of the Enron scandals. (For further information see, An Inside
Look At Internal Auditors.)

The external auditor's primary obligation is to users of financial statements outside the
organization. The internal auditor's primary responsibility is to company management. According
to the Institute of Internal Auditors (IIA), the internal auditor evaluates the risks the organization
faces with respect to governance, operations and information systems. Its mandate is to ensure
(a) effective and efficient operations; (b) the reliability and integrity of financial and operational
information; (c) safeguarding of assets; and (d) compliance with laws, regulations and contracts.

Tax Accounting
Financial accounting is determined by rules that seek to best portray the financial position and
results of an entity. Tax accounting, in contrast, is based on laws enacted through a highly
political legislative process. In the U.S., tax accounting involves the application of Internal
Revenue Service rules at the Federal level and state and city law for the payment of taxes at the
local level. Tax accountants help entities minimize their tax payments. Within the corporation,
they will also assist financial accountants with determining the accounting for income taxes for
financial reporting purposes.

Fund Accounting
Fund accountingis used for nonprofit entities, including governments and not-for-profit
corporations. Rather than seek to make a profit, governments and nonprofits deploy resources
to achieve objectives. It is standard practice to distinguish between a general fund and special
purpose funds. The general fund is used for day-to-day operations, like paying employees or
buying supplies. Special funds are established for specific activities, like building a new wing of
a hospital.

Segregating resources this way helps the nonprofit maintain control of its resources and
measure its success in achieving its various missions.

The accounting rules for federal agencies are determined by the Federal Accounting Standards
Advisory Board, while at the state and local level the Governmental Accounting Standards
Board (GASB) has authority.

Forensic Accounting
Finally, forensic accounting is the use of accounting in legal matters, including litigation support,
investigation and dispute resolution. There are many kinds of forensic accounting engagements:
bankruptcy, matrimonial divorce, falsifications and manipulations of accounts or inventories, and
so forth. Forensic accountants give investigate and analyze financial evidence, give expert
testimony in court and quantify damages.
ethical standards for cpa

Career and opportunities

The knowledge of accounting provides career opportunities at different levels (from entry-level
to executive) in many - if not all - industries. In the United States alone, accounting services
industry generates revenue of about $125 billion per year and includes approximately 100,000
firms, according to the Research and Markets report released in April 2012. These firms provide
general accounting, bookkeeping, payroll, tax preparation, auditing, forensic accounting,
IT-auditing, internal auditing, assurance, consulting, risk advising, personal financial planning,
estate planning, and many other services.
According to the Bureau of Labor Statistics review released in January 2012, employment in
accounting and bookkeeping industry grew 8% and the national average hourly earnings were
$21.38. According to the Department of Labor, employment in the accounting industry is
projected to grow 22% by 2018.
Examples of accounting and bookkeeping jobs include the following: bookkeeper, accounting
clerk, staff/senior accountant, accounting manager, cost accountant, staff/senior auditor, audit
manager/senior manager, audit partner/senior partner, tax staff/senior/manager/senior
manager/partner/senior partner, junior/senior internal auditor, internal audit manager, treasurer,
controller, vice president of finance, chief financial officer (CFO), government accountant,
forensic accountant, nonprofit director, etc.
People choose an accounting career path for many reasons such as:
Job growth prospects: accounting industry has promising employment and salary growth
prospects
Transferable skills: accounting professions require quantitative, technical, communication,
critical thinking, and many other skills that can be applied in many industries (business,
government, education, nonprofits)
On-the-job learning: accounting professions provide an opportunity to learn how organizations
operate
Challenging environment: accounting professions require strong problem-solving and critical
thinking skills
Good lifestyle: many accounting professions provide good work-life balance and offer many
perks
Interpersonal communication: many accounting professions require working more with people
than numbers

Forms of Business Organization

These are the basic forms of business ownership:
1. Sole Proprietorship
A sole proprietorship is a business owned by only one person. It is easy to set-up and is the
least costly among all forms of ownership.
The owner faces unlimited liability; meaning, the creditors of the business may go after the
personal assets of the owner if the business cannot pay them.
The sole proprietorship form is usually adopted by small business entities.
2. Partnership
A partnership is a business owned by two or more persons who contribute resources into the
entity. The partners divide the profits of the business among themselves.
In general partnerships, all partners have unlimited liability. In limited partnerships, creditors
cannot go after the personal assets of the limited partners.
3. Corporation
A corporation is a business organization that has a separate legal personality from its owners.
Ownership in a stock corporation is represented by shares of stock.
The owners (stockholders) enjoy limited liability but have limited involvement in the company's
operations. The board of directors, an elected group from the stockholders, controls the
activities of the corporation.
In addition to those basic forms of business ownership, these are some other types of
organizations that are common today:
Limited Liability Company
Limited liability companies (LLCs) in the USA, are hybrid forms of business that have
characteristics of both a corporation and a partnership. An LLC is not incorporated; hence, it is
not considered a corporation.
Nonetheless, the owners enjoy limited liability like in a corporation. An LLC may elect to be
taxed as a sole proprietorship, a partnership, or a corporation.
Cooperative
A cooperative is a business organization owned by a group of individuals and is operated for
their mutual benefit. The persons making up the group are called members. Cooperatives may
be incorporated or unincorporated.
Some examples of cooperatives are: water and electricity (utility) cooperatives, cooperative
banking, credit unions, and housing cooperatives.