The easy answer to the question, what is accounting, is that it is a business language. Language refers to a technique of communication. As a result, the goal of this is to communicate or report the outcomes of corporate activities and their varied elements. The General Definition is. “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 financial character and interpreting the results thereof’. Another accepted definition of accounting is “The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of information”
Previously, accounting was primarily concerned with what had occurred, rather than attempting to foresee and plan for the future.
The following are the important steps for these activities.
- Creation and Collection of Data
- Evaluation of Data
- Analysis and interpretations
- Data Reporting
Creation and Collection of Data
Earlier times, accounting was largely concerned with what had happened, rather than making any attempt to predict and prepare for future. Creation and Collection of Data step provides raw material for accounting. An organization begins its accounting cycle with the identification of those transactions that comprise a bookkeeping event. This could be a sale, refund, payment to a vendor, and so on.
Once data is collected, it is documented in line with generally accepted accounting Policy. The recording and processing of information, forms a major part of total accounting effort. A significant number of transactions must be recorded in the books of original entry (journals) and ledgers. It is in line with the previously determined classification system. This processing can be done through manual, mechanical or electronic
Evaluation of Data
The most crucial action in the accounting method is evaluation of data. It entails regulating corporate activity through the use of budgets and standard Costing method and it is normally called budgetary control. It also includes assessing corporate performance, analyzing cash flow, and analyzing financial data for decision-making reasons.
Analysis and interpretations
Analysis and interpretation include examining the many components of financial statements, linking the components to one another and to the overall picture, and assessing whether any meaningful and helpful interpretation can be derived from this analysis. Capital project analysis, financial forecasts, budgetary projections and analysis for re-organisation, takeover or merger often lead to research-based reports.
Data evaluation is the process of verifying transactions as recorded in books of account and confirming financial statements. These processes are now usual for even medium-sized organizations to engage internal auditors to maintain a constant eye on cash flows and examine the financial system’s operation.
Data Reporting
Three are two types of reposts in Business-External and Internal. External reporting is the disclosure of financial information about the firm to outside parties (e.g., earnings, financial and fund status). These outside parties include Customers, Suppliers, Shareholders, Government Agencies, Regulatory Bodies and Government institutions. Internal reporting is focused with communicating financial analysis and assessment results to management and internal department stakeholders for decision-making purposes.
Stewardship Accounting
Historically, rich people employed ‘stewards’ to manage and control their land and property. These stewards reported on their stewardship to their owners on a regular basis. Even today, this concept remains at the basis of accounting and financial reporting, which essentially entails the orderly recording of corporate transactions, sometimes known as ‘book-keeping’. In some ways, stewardship accounting is linked to the necessity for company owners to keep records of their transactions, the property and tools they possess, the obligations they owe, and the debts others owe them. The accounting approach used today originated in Italy throughout the 15th century. This was common practice among traders at the time. During the nineteenth century, several European countries adopted this method, what became known as “double entry book-keeping.”
Financial Accounting
Accounting is another name for financial accounting. Accounting is defined by the American Institute of Certified Public Accountants as “an art of recoding, 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.”
The first phase in the accounting cycle is to identify transactions that will be recorded in books of accounts. Only transactions with a monetary consequence must be reported.
Second, company transactions are meticulously recorded in accordance with the Generally Accepted Accounting Practice (Golden Rules of Accounting). Similar transactions are grouped together and documented as such.
Third, when the number of transactions grows, it will be impossible to grasp the aggregate effect by referring to individual records. As a result, the art of accounting includes the phase of summarizing them.
Finally, the accounting process provides users with statements that describe what has occurred in the business. These statements help to determine if the business generated a profit or loss, and status of the business’s resources.
Cost Accounting
The English industrial revolution posed a challenge to the advancement of accounting as a tool of industrial management. Costing approaches were meant to serve as guidance for management decisions.
According to the Chartered Institute of Management Accountants (CIMA), Cost Accountancy is defined as “application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision-making.”
Cost accounting is a branch of accounting that studies the classification, recording, allocation, summary, and reporting of current and projected Costs. Cost accounting is widely used to support internal decision making and provides tools for management to evaluate performance and regulate costs of doing business. It essentially entails assigning costs to the various goods and services produced and sold by the company. Cost ideas and their application give a solid foundation for decision making. The goal of cost accounting is to provide management with information that can be utilized to administrate corporate activities. Modern computerized accounting packages, like as ERP systems, allow for the simultaneous processing of Financial and Cost Accounting information. To know more about ERP Systems follow this link – What is an ERP ?
Management Accounting
Management accounting is concerned with the preparation and presentation of accounting and controlling information in a format that aids management in the development of policies and decision-making on a variety of matters related to ordinary or non-routine business operations.
According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is “the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management Accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory authorities and tax authorities”
Management accounting has evolved over years of research and is basically synchronized with the requirements of business organizations and all entities associated with them. We will now see what are they and how accounting satisfies various needs of different stakeholders.
Management accounting has evolved over years of research. It is now mostly in harmony with the needs of business organizations and all entities linked with them.
Social Responsibility Accounting
It is a new phase in the evolution of accounting that arose as a result of increased social consciousness over the previous two decades or more. Social Responsibility broadens the scope of accounting by taking into consideration the social consequences of corporate choices in addition to the economic consequences.
Management is held accountable not just for the efficient operation of the business as measured by profitability, but also for what it contributes to societal well-being and advancement.
Human Resource Accounting
Human resource accounting is defined as the process of identifying, measuring, and distributing data on human resources to Management and other stake holders. It is the process of Accounting for human capital investment and replacement costs. This method is also using for recording for the economic worth of people to an organization. This is the Methods for evaluating and accounting for human resources are either cost-based or based on the economic worth of human resources.
Inflation Accounting
Inflation accounting is better known as ‘price level accounting’. It is a special technique used to adjust the financial statements. When there is a significant level of price inflation, the company’s financial statements are changed. So making historical information on the financial statements useless or less valuable. It is concerned with the adjustment of the value of both Current and Fixed assets. It is also concerned with profit in response to price fluctuations of these items. This attempts to solve the discrepancies in reported results brought by changes in the price levels of these assets.
The inflation technique allows a business to show or have a sensible picture of their gains. It is due to present cost coordinates with present revenues. Thus, the effects of inflation accounting on organizational decisions and financial performance
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