Definition of Accounting

According to the institute of certified public

accountants(AICPA)" Accounting is the art of
recording, classifying, summarising in a
significant manner and in terms of money
transactions and events which are of a financial
character and interpreting the results thereof".
The following detailed explanation makes each
of them clear.
1. Recording:
Systematic recording of business
transactions is a first step in the accounting
process. Each and every transaction is recorded
as and when it occurs in chronological order.
Every entry recorded has to be supported by
reliable documentary evidence.
Recording of business transactions is usually
done in journal or subsidiary books which are
"books of original entry".
2. Classification:
It is the process of grouping transactions
or entries on a predetermined basis. The
classification takes the form of "accounts" in a
separate book known as ledger.
3. Summarising:
The classified data in the ledger is
presented periodically in the form of trial
balance, trading account, profit and loss
account balance sheet.
4. Significant manner:
Accounting process of recording,
classifying and summarising must be carried on
in a significant manner.
5. In terms of money:
All business transactions have to be
recorded in terms of money. Money
measurement is the basis for accounting.
6.Transactions and events of financial
character:
All those business transactions and events
which are financial in character are recorded in
accounts.
7. Interpreting the results:
Interpretation of the results is recorded
for various purposes. The owners are interested
in the amounts of profit. The creditors are
interested in the liquidity and stability of the
business.
Advantages of Accounting:
The following are the main advantages of
accounting:
1. Systematic records:
All the business transactions are recorded
in the books of accounts. Any event or
happening which has financial effect is
included in the accounting records.
2. Preparation of financial statements:
Results of business operations and the
financial position of the concern are provided
by accounting periodically.
3. Assessment of progress:
Accounting analyses and interprets
financial statements to reveal the progress
made in different areas and it also identifies
weakness and stagnation.
4. Aid to decision making:
Accounting provides the relevant data to
make the decisions appropriate and effective.
5. Statutory requirements:
Various legal requirements like
maintenance of provident fund for employees,
Employees state Insurance contributions,
reduction of tax at source, filing of tax Returns
etc are properly fulfiled with the help of
accounting.
6. Information to interested groups:
Accounting supplies appropriate
information to different interested groups such
as owners, creditors, employees, financiers, tax
authorities and government.
7. Evidence in courts:
Accounting records are usually accepted
as authentic evidence in courts of law in the
settlement of disputes.
8.Taxation problems:
Accounting records are the basic source for
computation and settlement of sales tax,
income tax and other local taxes.
9. Merger of firms:
When two or more existing businesses
decide to merge, accounting records are the
basis for deciding the terms of merger and any
compensation payable as a consequence of
merger.
Limitations of accounting:
Accounting has its own limitations:
1. It cannot record all the events and
transactions taking place in an enterprise.
2. It ignores transactions which cannot be
expressed in terms of money.
3. It cannot measure the qualitative aspects of
the products, policies, management and the
workers.
4. It cannot quantify the morale of employees
in the organisation.
5. Accounting relies on estimates so accounting
results may not be accurate and reliable.

Double entry system:

 According to this system every transaction
has two aspects.one is benefit receiving aspect
or incoming aspect, and the other one is
benefit giving aspect or outgoing aspect.The
benefit receiving aspect is said to be a "debit"
and the benefit giving aspect is said to be a
"credit".For every transaction, one account is
to be debited and another account is to be
credited in order to have a complete record of
the transaction.
Meaning of debit and credit:
The word Debit is derived from the Latin
word Debitum which means Due for that.
In short the benefit receiving aspect of a
transaction is known as debit.
The word credit is derived from the Latin
word creder which means Due to that. The
benefit giving aspect of the transaction is
known as credit.
The abbreviations " Dr" for debit and "Cr"
for credit are usually used.By convention, the
left hand side of an account is termed as debit
side and right hand side of an account is
termed as credit side.
Accounting concepts:
Accounting concepts are the assumptions
or postulates or ideas which are essential to
the practice of accounting and preparation of
financial statements.
1. Business entity concept:
According to the entity concept, the entity
that represents the association of persons is
considered distinct and separate from the
owners, managers and employees of the
Enterprise.
2. Going concern concept:
According to this concept, the Enterprise is
normally viewed as a Going Concern, that is, as
continuing in operation for the foreseeable
future.
3. Money Measurement Concept:
All business transactions are measured,
expressed and recorded in terms of money.
4. Dual aspect concept:
Every business transaction recorded in the
books of accounts of a business has two
aspects, Receiving of benefit and giving of
benefit. Both the aspects must be recorded in
appropriate accounts of the business.
Capital + liabilities = Assets
 or
Capital = Assets - Liabilities.

5. Accounting period concept or periodicity

concept:
The usual accounting period is one year.
Accounting period helps to measure the income
generated during the specific accounting
period.
6. Cost concept:
According to cost concept, assets are
recorded at the price paid to acquire them.

7. Realisation concept or Revenue Recognition

concept:
 According to the Realisation concept,
revenue is considered as earned on the date
when it is realised.
8. Matching concept:
Matching of revenues and costs relevant
to a specific period is called the matching
concept.
9. Accrual concept:
This concept makes a distinction between
receipt of cash and the right to receive cash and
payment of cash and the legal obligation to pay
cash in relation to revenues and expenses
respectively.Revenues and costs are accrued
that is recognised as they are earned or
incurred and not as money is received or paid.
10. Objective Evidence Concept:
 All Accounting entries must be based on
objective evidence. "objective" refers to
verifiability, reliability and absence of bias.No
transaction must be recorded in the books of
accounts without verifiable documentary
evidence.
Accounting conventions:
Accounting conventions are the established
traditions, customs, methods and practices
which usually act as guidelines for preparation
and presentation of accounts.The following are
the generally accepted accounting conventions:
1. Convention of full disclosure:
According to this convention, all accounting
statements should be prepared honestly.
The statement should disclose fully all the
significant information.
2.Convention of consistency:
According to this convention, the rules,
practices and concepts used in accounting
should be continuously observed and applied
year after year.
3. Convention of materiality:
Materiality means " relative importance".
All important items and facts should be
disclosed in accounting statements.
4. Convention of conservatism:
Conservatism is a policy of caution or
"playing safe".Conservatism is the defensive
accounting mechanism against. uncertainty.