Meaning and Scope of Accounting

Accounting in general

Every person in the world in engaged in some kind of economic activity. For example, a salaried person gets the salary which he spends to buy food and clothing, his children’s education, medical expenses etc. A business concern doing the sale of goods or providing services, a local authority providing social amenities, all these activities are directed toward economic activities. These activities are performed through ‘Transactions and Events”.

The transaction is meant ‘a business, performance of act’ etc. While event means ‘ a happening, as a consequence of transaction i.e. a result.’

Example

Now we shall understand it in practical terms:

For example, A sole proprietor invests $200000 for running a business. On January 1st, he purchases goods for $115000 and sells them for $ 147000. He pays the shop rent for the month of January $5000. There is a stock left for $15000 in hand. In this case, he carries on a few transactions and faces some events. Now he wants to evaluate the result of his business activity.

Here we go

 

Goods sold                                                                         $ 1,47,000

Goods in hand                                                                   $     15,000

$1,62,000

Less: Goods Purchased                 $1,15,000

Rent paid                                 $      5,000            $1,20,000

Surplus                                                                                               $    42,000

 

Here investing money, purchasing goods, paying rent, selling goods etc. are transactions. While earning surplus of $42,000 is an event; having closing stock is another event.

Similarly, the State and Central Government of any country raises money through taxes, pays salary to its employees and spend on the other activities performed by it. When its receipts are more than expenditures it there is surplus, on the other hand, it suffers deficit when expenditures are more than revenues.

So, we can conclude that every person wants to keep records of all transactions and events to have an adequate information about the economic activity for the purpose of decision making. Therefore, the accounting discipline emerged to serve this purpose of measurement of economic activities. Accounting deals with the measurement of economic activities involving inflows and outflow of economic resources, which facilitates to develop useful information for decision-making process.

Accounting has a universal application for recording transactions and events and presenting suitable information to help in decision-making regarding any type of economic activity ranging from a small level to large level.

The growth of accounting discipline is associated with the development of the business world. Therefore, to understand accounting as a field of study for universal application, it should be related with recording of business transactions and communication of financial information of business enterprise to facilitate decision making. The main objective of accounting is to meet the information needs of rational and sound decision making. Hence, it is also called language of business.

Accounting in Specific

The Committee on terminology set up by the American Institute of Certified Public Accountants (AICPA) defines accounting as follows:

Accounting is 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 a financial character, and interpreting the result thereof.

As per this definition, accounting is simply an art of record keeping. The process of accounting starts by first identifying the events and transactions which are of the financial character and then to record them in books of account.

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