Aspects of Accounting

On the basis of the above definitions, the procedure of accounting can be basically divided into two parts:

1. Generating financial information and
2. Using the financial information.

The procedural aspects of accounting can be explained with the help of the following chart:

   Generating Financial Information

1. Recording – This is the basic function of accounting. All business transactions of a financial character, as evidenced by some documents such as sales bills, passbooks, salary slips, etc. are recorded in the books of account. The recording is done in a book called “Journal”. This book may further be divided into several subsidiary books according to the nature and size of the business.
2. Classifying – Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place so as to put information in compact and usable form. The book containing classified information is called “Ledger”.
3. This book contains on different pages, individual account heads under which, all financial transactions of similar nature are collected. For example, there may be separate account heads for Salaries, Rent, Printing and Stationeries, Advertisement, etc. All expenses under these heads, after being recorded in the Journal, will be classified under separate heads in the Ledger. This will help in finding out the total expenditure incurred under each of the above heads.
4. Summarizing – It is concerned with the preparation and presentation of the classified data in a manner useful to the internal as well as the external users of financial statements. This process leads to the preparation and presentation of the classified data in a manner useful to the internal as well as the external users of financial statements. This process leads to the preparation of the following financial statements:
5. Trial Balance
6. Profit and Loss Account
7. Balance Sheet
8. Cash-flow Statement.
9. Analyzing – The term ‘Analysis’ means the methodical classification of the data given in the financial statements. The figures given in the financial statements will not help anyone unless they are in a simplified form. For example, all items relating to fixed assets are put in one place while all items relating to current assets are put in another place. It is concerned with the establishment of a relationship between the items of the Profit and Loss Account and Balance Sheet i.e, it provides the basis for interpretation.
10. Interpreting – This is the final function of accounting. It is concerned with explaining the meaning and significance of the relationship as established by the analysis of accounting data. The recorded financial data is analyzed and interpreted in a manner that will enable the end-users to make a meaningful judgment about the financial condition and profitability of the business operations. The financial statement should explain not only what had happened but also why it happened and what is likely to happen under specified conditions.
11. Communicating – It is concerned with the transmission of summarized, analyzed, and interpreted information to the end-users to enable them to make rational decisions. This is done through the preparation and distribution of accounting reports, which include besides the usual profit and loss account and the balance sheet, additional information in the form of accounting ratios, graphs, diagrams, fund flow statements, etc.

The first two procedural stages of the process of generating financial information along with the preparation of trial balance are covered under book-keeping while the preparation of financial statements and their analysis, interpretation, and also its communication to the various users are considered as accounting stages.

 Using the Financial Information

There are certain users of accounts. Earlier it was viewed that accounting is meant for the proprietor or owner of the business, but changing social relationships diluted the earlier thinking. It is now believed that besides the owner or the management of the business enterprise, users of accounts include the investors, employees, lenders, suppliers, customers, government and other agencies, and the public at large. Accounting provides the art of presenting information systematically to the users of accounts. Accounting data is more useful if it stresses economic substance rather than technical form. Information is useless and meaningless unless it is relevant and material to a user’s decision. The information should also be free of any biases. The users should understand not only the financial results depicted by the accounting figures but also should be able to assess its reliability and compare it with information about alternative opportunities and past experience.

The owners or the management of the enterprise, commonly known as internal users, use the accounting information in an analytical manner to take valuable decisions for the business. So the information served to them is presented in a manner different from the information presented to the external users. Even the small details which can affect the internal working of the business are given in the management report while financial statements presented to the external users contain key information regarding assets, liabilities, and capital which are summarized in a logical manner that helps them in their respective decision-making.

The entire procedure of accounting can be explained with the help of the chart given below:

PROCESS OF ACCOUNTING

Evolution of Accounting as a social science

In its oldest form, accounting aided the stewards to discharge their stewardship function. The wealthy men employed stewards to manage their property; the stewards in turn rendered an account periodically of their stewardship. This ‘ Stewardship Accounting’ was the root of the financial accounting system.

The presently followed system of double-entry book-keeping has been developed only in the 15th Century. However, historians found records of debit and credit dating back to the 12th Century. Although the double-entry system was followed, ‘stewardship accounting’ served the purpose of businessmen and wealthy persons at that time. In India too, stewardship accounting was prevalent till the emergence of large-scale enterprises in the form of public limited companies.

In the second phase, the idea of financial accounting emerged with the concept of Joint Stock Company and divorce of ownership from the management. To safeguard the interest of the shareholders and investors, disclosure of financial statements (mainly, profit and loss account and balance sheet) and other accounting information was molded by law.

Financial statements give periodic performance reports by way of profit and loss account and financial position at the end of the period by way of the Balance Sheet. It got the legal status due to changing relationships between the owners, economic entity, and the managers. With the democratization of society, the relationships between the enterprises, on the one hand, the investors, employees, managers, and governments, on the other hand, have also undergone a sea-change. Also, the prospective investors and other business contact groups want to know a lot about the business before entering into transactions.

Thus, financial accounting emerged as an information system to identify measure, and communicate useful information for informed judgments and decisions by a broad group of users. In the third phase, accounting information was generated to aid management decision-making in particular. It contributed a lot to improving the quality of management decisions. This new dimension of accounting is called Management Accounting and it is the development of the 20th century only. It is pervasive enough to cover all spheres of management decisions.

Lastly, Social Responsibility Accounting is in the formative process, which aims at accounting for the social cost incurred by the business as well as the social benefit, created by it. It emerges from the growing social awareness about the undesirable by-products of economic activities.

While earning a profit, an enterprise incurs numerous social costs like pollution, using the resources of society like materials, land, labor, etc. to compensate for this social cost, in today’s world, an enterprise is expected to generate some social benefits also like employment opportunities, recreation activities, more choice to customers at a reasonable price, better quality products, etc.

Therefore it is demanded that the accounting system should produce a report measuring the social cost incurred and social benefits generated.

Social Science studies man as a member of society; they concern about social processes and the results and consequences of social relationships. The usefulness of accounting to society as a whole is the fundamental criterion to treat it as a social science.

Although individuals may benefit from the availability of accounting information, the accounting system generates information for social good. It serves social purposes, it contributes to social progress; also it is being adapted to keep pace with social progress. So, accounting is treated as a social science.