Nature And Scope Of Accounting?

Scope of Accounting:

Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, the is also the need for interpretation and communication of those information to the appropriate persons. Only accounting use can help overcome these problems.
In the modern world, accounting system is practiced no only in all the business institutions but also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc.and also Government and Local Self-Government in the form of Municipality, Panchayat.The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some suitable types of accounting methods. As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions.
The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems.
 

Nature of Accounting:

We know Accounting is the systematic recording of financial transactions and presentation of the related information of the appropriate persons. The basic features of accounting are as follows:
1. Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting.
2. Accounting is an art: Accounting is an art of recording, classifying, summarizing and finalizing the financial data. The word ‘art’ refers to the way of performing something. It is a behavioral knowledge involving certain creativity and skill that may help us to attain some specific objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires applied skill and expertise. So, by nature accounting is an art.
3. Accounting is means and not an end: Accounting finds out the financial results and position of an entity and the same time, it communicates this information to its users. The users then take their own decisions on the basis of such information. So, it can be said that mere keeping of accounts can be the primary objective of any person or entity. On the other hand, the main objective may be identified as taking decisions on the basis of financial information supplied by accounting. Thus, accounting itself is not an objective, it helps attaining a specific objective. So it is said the accounting is ‘a means to an end’ and it is not ‘an end in itself.’
4. Accounting deals with financial information and transactions; Accounting records the financial transactions and date after classifying the same and finalizes their result for a definite period for conveying them to their users. So, from starting to the end, at every stage, accounting deals with financial information. Only financial information is its subject matter. It does not deal with non-monetary information of non-financial aspect.
5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has been evolved out to meet the need of financial information required by different interested groups.

Information supplied by Accounting

If we analyze critically the different definitions of accounting and discuss the different aspects of its objectives,, it will be clear that modern accounting is developing gradually towards a more and more managerial bias. The management and accounting are becoming gradually interdependent. The Accounting prepares some essential information and gives reports regarding those informations to the various interested persons. Accounting helps us to have some information regarding the following:
1. The nature and amount of incomes.
2. The nature and amount of expenses.
3. The nature and amount of possible losses.
4. The nature and amount of actual losses.
5. The size and volume of Capital Employed.
6. The increase or decrease in the volume of capital employed.
7. The nature and value of assets owned.
8. The nature and value of liabilities outstanding.
9. The specific amounts due to the business and their nature.
10. The specific amount due by the business and their nature.
11. The specific amount due to be paid to the government and their nature.
12. The reports regarding the interpretations of the financial results.
The following are the various Books of information and reports prepared by the Accountant.
1.The Cash Book giving information regarding Cash in hand and cash at bank as well as the inflows and outflows of the money resources
2.The various Day Books, like purchase Day Book, Sales Day Book, Return Inward Day Book, Return Outward Day Book, Bills Receivable Day Books, Bills Payable Day Book  etc., containing information regarding Credit Purchase, credit sales, Returns form customers, returns to creditors, Bills accepted, bills received.
3. The journal proper containing information regarding errors and their rectifications, expenses paid in advance, incomes received in advance, outstanding expenses, accrued incomes etc.
4. List of debtors and creditors showing the amounts receivable and payable by the business.
5. Manufacturing account showing the cost of production with proper stage-by-stage analysis.
6. The trading account showing the Gross Profit earned or Gross Loss suffered by the business.
7. The profit and loss account showing the net profit or loss of the operation of the business for the period concerned.
8. The profit and Loss appropriation account showing the various items of appropriations of the net profits and also showing the amount of transfer to the reserve fund etc.
9. The Balance she at the end of the financial period showing the position of the assets and liabilities of the concern. This also gives information regarding the receivables and payables.
10. Reports regarding costs, overheads, budgets and variances.
11. Reports regarding net assets and net proprietary positions.
12. Reports regarding valuations of stocks and inventories.
13. Reports regarding valuations of various assets and liabilities.
14. Reports regarding provisions for bad and doubtful debts and recovery of previous Bad debts.
15. Report regarding the availability of funds for the replacement of assets and redemption of liabilities.
16. Statement for reconciliation of the apparent differences between the Cash Book as shown by the Cash Book and that as shown by the Bank pass Book at the end of the financial period.

Uses of information

Uses of information:
The users of information available from the accountant of any business unit may be divided into two distinct classes:
1. Internal users like managers, internal auditors, and the persons who are strictly related to the day –to-day affairs of the business.
2.External users, like the contributories to the Capital, proprietors, investors, money lenders, creditors, tax-gatherers, government authorities, labor unions, researchers etc.
The amount of detail included in any information will vary according to the category of the users for whom it is intended.
The various use of information to the different types of persons related directly or indirectly to the business may be given as follows:
A. Internal Users:
The managers and other persons like internal auditors who are very much related to the day-to-day affairs of the business, are benefited to a great extent by information prepared by the accountant. With the help of the various charts, reports, graphs, ratios etc., they are able to co-ordinate better between different departments and also take steps for the developmental projects. Moreover, future planning and budgeting also are not possible without the help of this information. Furthermore, for the purpose of price fixation of the producers, declaration of dividends, interim-dividends etc., and also for framing future financial plans, these information are essential.
B.External users:
1. Proprietors, Partners, and Shareholders etc: These types of persons are always interested to know about the security of their capital. They also want to know how much profit they can earn out of the particular business. Moreover, they are interested in the stability of the business in which they have invested their capital. They can know all these very well with the help of the information supplied by the accountant.
2. Money lenders: These persons want to know the stability of the business, interest-paying capacity of the business and also its ability to repay the principal amount of their loan. These they can know from various financial statement s prepared by the accountant.
 3. Creditors: Creditors would always like to gather definite information regarding the financial fluidity of the business before granting any credit. The financial positions of any business can be known from the various published accounts.
4. Banks: Whenever any Bank becomes interested to work for any business unit, especially to grant overdrafts, it is essential for it to be sure before hand regarding the financial soundness of the business. Banks can know this from the final accounts and other information given by the accountant.
5. Ptobable Investors: Investors are interested in the continuity and stability of the business. They want security against their investment s. That any business is sound and secure may be known from the various information furnished by the accountant.
6. Debenture holders: Like the investors, the Debenture holders also would be very keen to inquire about the financial solvency and soundness of the business. They would also be eager to have regular returns on their investments in debentures. These can be aware of from the various published accounts and reports.
7. Public: The interested common men can also have some knowledge about the value of shares, debentures etc. and also about the financial strength of the concern from the accounts and allied information.
8. Employees and trade unions: In the interest of their movements, employees’ organizations and trade-unions should be always aware of the financial position of the industry and the organization in particular. Their purpose is well augmented by the various information given by the accountant.
9.Government: The Central, state and sometimes the Local Self Government want to have authoritative control over the industrial organizations and business units for the greater interest of the public. When or at what point of time and condition such restrictive measures should be imposed to serve the interest of the common people best, can be easily known from the information supplied by the accounts.
10. Tax-authorities: The final accounts help the tax –gathers and authorities in calculating and imposing proper taxes and their collection.
11. Industrial Authorities: For the development of industries in the country, the Industrial Authorities should be always aware of the affairs of the business units. Weak industries should be helped and sometimes taken over by the Government. These authorities are helped to a great extent by the accounts and other information.
12. Company-Law Boards etc: For framing various financial rules and for designing the special accounting techniques and rules for special statutory organizations constituted by special acts of the Legislature, the Company-Law Boards etc.and other authorities should be always well-informed regarding the accounts and other allied reports of business concerns.
13. People’s Representatives: Members of the Parliament and other Representatives of the people should know in minute’s details the position of industrial and commercial development within the country. They can judge the situation from different angles with the help of the published accounts and reports and allied information.
14. Economists and Researchers; The Economist and Researchers also need the help of various types of information supplied by the accounts augment their research-work and developmental thesis.
So, it may be concluded that accounting information are at present essential to almost all types of persons in the Society. Accounting is needed by all and its users are almost universal.

Accounting Cycle:

A cycle means the happening of events in a systematic manner and recurring of the same at regular intervals. The accounting activities are undertaken in such a sequence that they form a cycle. That is why the term “accounting cycle” refers to the activities relating to the different stages involved in accounting process .As these steps are undertaken repeatedly is a sequential manner in each accounting period, as a whole they are identified and termed as a cycle.

The steps or phases involved in an accounting cycle are: (i) recording of financial transactions, (ii) classification and summarization of the recorded transactions and (iii) preparation of Trial Balance and Final Accounts. So each accounting cycle starts from recording of transactions in Journal and ends in preparation of financial statements.

The above stages of an accounting cycle are discussed hereunder:
(i) Recording: As soon as the financial transactions take place they are recorded in journal or primary books of accounts. Accounting process starts with the task of recording.
(ii) Classifying and summarizing: After recording the recorded transactions are classified into personal, real and nominal accounts and accordingly they are posted in different ledger accounts. The balancing of ledger accounts helps providing summarized information of classified transactions.
(iii) Preparation of Trial Balance and Final Accounts: At the end of a particular time span Trial Balance is prepared with the ledger balances to check the arithmetical accuracy of the first two accounting steps. Similarly at the end of a particular accounting period, to find out the end result of the transactions recorded in that period, a Profit and Loss Account is prepared. Along with the Profit and Loss Account a Balance sheet is prepared on the closing day of the accounting period to exhibit the claims owned and debts owed by the concern.

The above steps are followed in the same order in each accounting period. The concept of accounting cycle is further explained in the following diagram.