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Financial Accounting

Meaning of Accounting

According to American Institute of Certified Public Accountants (AICPA), “Accounting is the art of recording, classifying and summarizing in a significant manner and  in terms of money, transudations and events which are, in part at least, of a financial character and interpreting the results thereof.

As an information system, accounting is the process of identifying, measuring, recording and communicating the economic events of an organization to interested users of the information such as shareholders, investors.

Objectives And Role of Accounting

The primary objectives of accounting are to :

(1)    maintain records
(2)    Calculate profit or loss during a given period;
(3)    Depict the financial position at the end of a given period; and
(4)    Make information available to various groups and users.

Accounting is not an end in itself. It is means to an end. It plays the role of (1) providing service to the users; (2) describing, analyzing and reducing a mass of data into reports and statements that show the financial status and performance results of an enterprise; and (3) and accounting information system.

Branches of Accounting

(i)    Book-keeping. It is the science of recording translation in terms of money. Book-keeping in clues recording in journals, positing to ledgers and balancing of accounts. In other words, recording before the preparations of trial balance is the subject-matter of book-keeping.

          Difference between book-keeping and accounting should be clearly noted.                   Book-keeping involves only the recording of business transitions, while accounting involves  identifying, measuring, recording and communications of financial information.

(ii)    Financial Accounting. Financial accounting is concerned with recording and summarizing financial transitions and preparing financial statements relating to the business in accordance with the generally accepted accounting principles.

(iii)    Cost Accounting. Cost accounting is concerned with the determination of costs of the goods and services manufactured or offered by the business. An efficient system of cost accounting is essential to ensure the best possible use of scarce resources, such as materials, labour and overheads.

(iv)    Management Accounting. Management accounting relates to the use of financial and cost data for purposes of evaluating the performance of the business as a whole and of various departments in relation to predetermined targets. It helps in reviewing existing policies, laying down new policies, preparing future plans and making management decisions for the efficient running of business and maximizing profits.

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