ASSIGNMENT

Submitted To: Miss Zahida Parveen

Submitted By: Sabeen Naveed

Roll No. 1410406

Subject: Advanced Accounting Theory and Practice

Class: B. Com (VIII)

Session: 2014-2018

Department: Management Sciences

Govt. Post Graduate Islamia College for Women Cooper

Road, Lahore
 The Basic Structure of Accounting

The Nature of Accounting:

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. 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. 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. 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
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.

Functions of Accounting:

Functions of accounting are also referred to as the purpose of objectives of accounting.

Functions of accounting include:
 Accounting ensures the accurate recording and presentation of financial information to help
in the decision-making process.
 Accounting ensures accountability and integrity.
 Through common size statements, a company can compare its financial performance with
its competitors.
 Accounting information can be used to measure the financial strength of related and
unrelated entities.
 It presents information which enables managers render records of stewardship to the
owners of the business (i.e Shareholders).
 Accounting helps in making investment decisions. Through the analysis of financial data,
investors can ascertain if it would be worthwhile to invest in a business.
 Accounting aids in planning. With accounting, you can draw up both financial and
operational plans, then measure actual results, compare the plan with the actual results,
measure the differences between the actual results and the plan, and find reasons for the
differences.
 Accounting gives the government and its various agencies a clear view of the organization’s
financial dealings. This helps the government accurately ascertain tax due to the
organization, and also access the financial strength and performance of the organization.

Objectives of Accounting:

The following are the main objectives of accounting:

1. To maintain full and systematic records of business transactions:

Accounting is the language of business transactions. Given the limitations of human
memory, the main objective of accounting is to maintain ‘a full and systematic record of
all business transactions.
2. To ascertain profit or loss of the business:
Business is run to earn profits. Whether the business earned profit or incurred loss is
ascertained by accounting by preparing Profit & Loss Account or Income Statement. A
comparison of income and expenditure gives either profit or loss.
3. To depict financial position of the business:
A businessman is also interested in ascertaining his financial position at the end of a given
period. For this purpose, a position statement called Balance Sheet is prepared in which
assets and liabilities are shown.
4. To provide accounting information to the interested parties:
Apart from owner of the business enterprise, there are various parties who are interested in
accounting information. These are bankers, creditors, tax authorities, prospective investors,
researchers, etc. Hence, one of the objectives of accounting is to make the accounting
information available to these interested parties to enable them to take sound and realistic
decisions. The accounting information is made available to them in the form of annual
report.

Users of Accounting Information:

Accounting information helps users to make better financial decisions. Users of financial
information may be both internal and external to the organization.

1. Internal users (Primary Users) of accounting information include the following:

 Management: for analyzing the organization's performance and position and taking
appropriate measures to improve the company results.
 Employees: for assessing company's profitability and its consequence on their future
remuneration and job security.
 Owners: for analyzing the viability and profitability of their investment and
determining any future course of action.

Accounting information is presented to internal users usually in the form of management

accounts, budgets, forecasts and financial statements.

2. External users (Secondary Users) of accounting information include the following:

 Creditors: for determining the credit worthiness of the organization. Terms of credit
are set by creditors according to the assessment of their customers' financial health.
Creditors include suppliers as well as lenders of finance such as banks.
 Tax Authorities: for determining the credibility of the tax returns filed on behalf of the
company.
  Investors: for analyzing the feasibility of investing in the company. Investors want to
make sure they can earn a reasonable return on their investment before they commit
any financial resources to the company.
 Customers: for assessing the financial position of its suppliers which is necessary for
them to maintain a stable source of supply in the long term.
 Regulatory Authorities: for ensuring that the company's disclosure of accounting
information is in accordance with the rules and regulations set in order to protect the
interests of the stakeholders who rely on such information in forming their decisions.

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 not 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.

Accounting Basis and Policies:

The basis of accounting refers to the methodology under which revenues and expenses are
recognized in the financial statements of a business. When an organization refers to the basis
of accounting that it uses, two primary methodologies are most likely to be mentioned:
1. Cash basis of accounting. Under this basis of accounting, a business recognizes revenue
when cash is received, and expenses when bills are paid. This is the easiest approach to
recording transactions, and is widely used by smaller businesses.
2. Accrual basis of accounting. Under this basis of accounting, a business recognizes
revenue when earned and expenses when expenditures are consumed. This approach
requires a greater knowledge of accounting, since accruals must be recorded at regular
intervals. If a business wants to have its financial statements audited, it must use the accrual
basis of accounting, since auditors will not pass judgment on financial statements prepared
using any other basis of accounting.

A variation on these two approaches is the modified cash basis of accounting. This concept is
most similar to the cash basis, except that longer-term assets are also recorded with accruals,
so that fixed assets and loans will appear on the balance sheet. This concept better represents
the financial condition of a business than does the cash basis of accounting.

Accounting as the Language of Business:

Financial Accounting is often called the language of business; it is the language that managers
use to communicate the firm's financial and economic information to external parties such as
shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether
you run your own business, work as a manager or are just starting your career, you want to
understand financial information and be able to interact with accountants, controllers, and
financial managers. You want to talk business! This course will provide you with the
accounting language's essentials. Upon completion, you should be able to read and interpret
financial statements for business diagnosis and decision-making. More importantly, you will
possess the conceptual base to keep learning more sophisticated accounting and finance on
your own. Do not forget that, as with any other language, becoming proficient with accounting
requires constant practice.

Role of Accounting:

Accounting is not an end in itself; it is a means to an end. It assists by providing quantitative

financial information that can be helpful for the users in making better decisions regarding their
business. Accounting also describes and analyses the mass of data of an organization through
measurement, classification, and as well summation, and simplifies that data into reports and
statements, which show the financial situation and results of operations of that organization.
Accounting as an information system gathers processes and carries information about an
organization to a wide variety of interested investors or other parties.

Limitations of Accounting:

Accounting records relate to the transactions that are completed, which provide fairly good
account of the transaction of the business organization. However, for decision-making we need
the information, which relates not only to past but also about present and future. Financial
accounting makes provision for financial information but it does not provide non-financial
information such as behavioral and socio-economic. If the objective of accounting reports is to
influence the behavior through decision-making then it must provide the data concerning the
behavior and outcome of human activity to facilitate performance evaluation. Therefore, the
accounting information does not fully meet different types of information-requirements of
varied decision-making situations. Accounting provides stewardship information and not
decisional information.