Accounting is the science of recording and classifying business transactions and events,

primarily of a financial character, and the art of making significant summaries, analysis and
interpretations of those transactions and events and communicating the results to persons who
must make decisions or form judgement.

BOOK KEEPING is an art of recording in books of accounts the monetary aspectof commercial
or financial transactions.

Accounting has its characteristics in science as well as art. It has the artistic features of
recording,classifying and summarising business transactions to note the net profit and the
financial growth of the organisation. It also is based on certain specified principles and so fulfills
the scientific virtue. So accountancy is also a science since it is also an organised body of
knowledge based on certain specified principles and accounting standards. It includes the
recording of only financial transactions. There are so many transactions in the business which are
very important for business but which cannot be measured and expressed in terms of money and
hence such transactions will not be recorded. Events such as quarell between fellowmates are
definitely of moment to the oprganisation but they are not recorded. The events of such kind
affect the organisation in a financial manner as well but as their worth cannot be ascertained,
these are not recorded in the books of the business. It deals with recording business transactions
in accordance with certain rules. In small business where the transactions are quite small the first
recording is done in “JOURNAL”. After recording the transactions need to be classified.
Classification is the process of grouping the transactions of one nature at one place in a separate
account. After proper classification the afrt of summarising comes into picture. The data should
be presented in a manner that is easily comprehendable and useful for the managers or the others
interested in it. All transactions have to be converted in the form of money and then recorded.
The purchase of goods also should be first converted to their cash equivalent and then recorded.
The recording should be done in such a comprehensive way so that it is easy for proprietors,
managers, banks, creditors, employees etc to fully understand it and ascertain the financial
position.

Accounting is done to keep systematic record of business transactions according to a set of

ceratin rules. This avoids discrepancy and furthur avoids the possibility of frauds and amission.
The other main function of accounting is to ascertain the financial posiotion, net profit earned or
loss suffered. Further it helps to decipher the reasons for such profit and loss. It helps to compare
the results and know the progress of business from year to year.
INFORMATION Gatherers

Accounting information is used by various groups of people who are in a way attached to the
business. There are internal users as well as external users. Internal users are the persons who are
directly involved in managing and operating the business enterprise. They need accounting
information for the efficient and smooth running of the business enterprise. Then there are
external users. Individuals or organisations who have present or future interest in the business
enterprise but are not a part of management are called external users of accounting information.
These external users include the owners as they want to know about the profitability and
financial soundness of the business as they have to invest accordingly in the business. They not
only want to know the profit and loss but also the reasons behind it. The potential investors also
wish to have a knowledge about the same because then investing involves risk. They wish to
judge whether it is safe and rewarding to invest in the particular business. Then is the role of
creditors. They are the person who supply goods or services on credit. Before granting any credit
they need to be assured of the creditworthiness of the business enterprise. Accounting
information help them in assessing the financial capability of the enterprise and to know the
extent upto which the granting of credit will be safe. The lenders that are the banks and financial
institutions lend money to the business. As in the case of creditors even they wish to assess the
repaying capacity of the enterprise. Employees of the particular firm need information about the
profits of a business to know the ability of the business to pay higher wages and bonuses. Then
comes the biggest entity i.e. the government. The government is interested in the financial
statements of a business on account of assessment of income tax, sales tax, excise duty etc.
Researchers who wants to make an indepth study of the financial operations of an enterprise
need to have accesss to accounting information. Public also is generally interested in the
enterprises. It might be interested in knowing the trend of employemnt opportunities provided by
the enterprise and the measures adopted to control the level of pollution. Therefore, accounting
information is of great importance for both the internal and external users.

ACCOUNTING CONCEPTS

In order to make the accounting language exhibit the same meaning to all people and make it
more meaningful, most of the accountants have agreed on a number of concepts which are
usually used to frame accounting information. These act as a strong base for account making.
The basic concepts are discussed below.

BUSINESS ENTITY CONCEPT:- Business is treated as a unit separate and distinct from its
owners, creditors, managers and others. To frame it in other words, we may say that the owner of a
business is always considered as distinct and separate from the business he owns. Business unit should
have a completely different set of records and we should record the business transaction from the point
of view of the firm and not the owner or the proprietor. Proprietor is a creditor of the business to the
extent of capital invested by him in the business. This capital is the liability of the firm because it is
assumed that the firm has borrowed funds from its own properietors rather than borrowing it from
outside party. Because of this we allow interest on capital and treat it as an expense of the business.
Interest on capital reduces the profits of the firm and increases the capital of the proprietor. In the same
way, amount withdrawn by the proprietor from the business for his personal use is treated as drawings.
Likewise, goods used from the stock of the business for the own good of business are treated as
expenditure of the business but if they are used by the properietor then it is regarded as his drawings.

This separate entity concept ensures that owner’s or proprietor’s house, his personal investment in
securities, his personal car and personal income and expenditure are kept separate from the accounts of
the business entity. Also if the proprietor has another business entity doing some different business
then the records of the same will be maintained differently. The concept of separate entity is important
to accurately ascertain the net profit and financial position.

MONEY MEASUREMENT CONCEPT:- Only those transactions and events are recorded in accounting
which are capable of being expressed in terms of money. An event, even though it may be very
important for the business, will not be recorded in the books of business unless it effect can be
measured in terms of money with a fair degree of accuracy. For eg. Accounting does not record a quarell
between the production manager and sales manager; it does not report that a strike is beginning and it
does not reveal that a competitor has placed a better product in the market. These facts or happenings
cannot be expressed in money terms and thus are not recorded in the books. It has to be made explicitly
clear that money is the only measurement which enables various things of diverse nature to be added
up together and dealt with.

GOING CONCERN CONCEPT:- In This concept it is assumed that the business will continue to exist for a
long period in the future. The transactions are recorded in the books of the business on the assumption
that it is a continuing enterprise. The concept says that we record fixed assets at their original cost and
depreciation is charged on these assets without refrence to their market value . For eg. If a machinery is
purchased which would last, say, for the next 10 years, the cost of this machinery will be spread over the
next 10 years for calculating the net profit or loss of each year. Because of the concept of going concern
the full cost of the machine would not be treated as an expense in the year of its purchase itself. The
market value of the fixed assets in irrelevant and is not recorded in the balance sheet, as these assets are
not going to be sold in the near future.

ACCOUNTING PERIOD CONCEPT:- As the business is intended to continue indefinitely for a long period,
the true results of the business operations can be ascertained only when the business is completely
wound up. But ascertainment of profit after a very long period will be of a little use to the proprietors,
managers, investors and others because it will be too late to take corrective steps at that time. The users
of the financial statements need to know the results of a business at frequent intervals.

COST CONCEPT OR HISTORICAL COST CONCEPT:- According to this concept, an asset is ordinarily
recorded in the books of accounts at the price at which it was acquired. This cost becomes the basis of
all subsequent accounting for the asset. Since the acquisition cost relates to the past, it is referred to as
historical cost. This cost becomes the basis of all subsequent accounting for the asset. Since the
acquisition cost relates to the past, it is referred to as historical cost. This cost is the basis of valuation of
the assets in the financial statements. For eg. If a business entity purchases a building for rs. 5,00,000 it
would be recorded in the books at this figure. Subsequent increase or decrease in the market value of
the building would not be recorded in the books of accounts. If two years later the market value of the
building shoots up to rs. 10,00,000 the increased value will not be ordinarily recorded in the books of
accounts.

This concept never means to say that assets will be continuously shown at their acquisition price for as
long as the business entity owns them. Their cost is systematically reduced by charging depreciation.

The cost meantioned as per the cost concept is easily verifiable because there is actual transaction and
not an arbitary one. It also supports the growing concern concept which mentions that the organisation
will continue and so there is no need of using the current values. Market values or current values are
difficult to determine because they are ephemeral and change from time to time. There are certain
drawbacks to this concept as well. The transactions for which nothing is paid are not recorded even
though they might be of moment. Also during periods of inflation, the figure of net profit disclosed by
profit and loss account will be seriously distorted because depreciation based on historical costs will be
charged against revenues at current prices. Information based upon historical cost may not be useful to
management, investors, creditors etc.

DUAL ASPECT CONCEPT:-

This concept tells that every business transaction is recorded as having a dual aspect. To frame it
otherwise, every transaction affects at least two accounts. If one account is debited then the other must
be credited. The system of recording transactions based on this concept is called as “double entry”
system. If a transaction affects (increases or decreases) the one side of the accounting equation then it
will also affect (increases or decreases) the other side of the equation.

REALISATION CONCEPT:- Revenue means the amount which is added to the capital as a result of
business operations. Revenue is earned by sale of goods or by providing a service. Concept of revenue
recognition determines the time or particular period in which the revenue is realised. Revenue is
deemed to be realised when the title or the ownership of the goods has been transferred to the
purchaser and when he has legally become liable to pay the amount. For eg. If a firm gets an order of
goods on 1st january, supplies the goods on 20th january and receives the cash on 1st april the revenue will
be deemed to have been earned on 20 th january as the ownership of goods was transferred on that day.
MATCHING CONCEPT:- According to this concept, in determining the net profit from business
operations, all costs which are applicable to revenue of the period should be charged against that
revenue. Accordingly, for matching costs with revenue, first revenues should be recognised and then
costs incurred for generating that revenue should be recognised.

ACCRUAL CONCEPT:- In accrual concept revenue is recorded when sales are made or services are
rendered and it is immaterial whether cash is received or not. Similarly, in this concept expenses are
recorded in the accounting period in which they assist in earning the revenues whether actual cash has
been paid or received or not.

OBJECTIVITY CONCEPT:- This concept requires that accounting transaction should be recorded in an
objective manner, free from the personal bias of either management or the accountant who prepares
the accounts. It is possible only when each transaction is supported by verifiable documents and
vouchers such as cash memos, invoices, sales bills, pay-in-slip, correspondence, agreements etc.

ACCOUNTING CONVENTIONS

Accounting conventions may be defined as a custom or generally accepted practice which is adopted
either by general agreement or common consent among accountants.

CONVENTION OF FULL DISCLOSURE:- This principle requires that all significant information relating to
economic affairs of the enterprise should be completely disclosed. In other words, there should be a
sufficient disclosure of the material information such as proprietors, present and potential creditors,
investors and others. Certain facts or items which do not find place in accounting statements are shown
in the balance sheet by way of footnotes.
CONTINGENT LIABILITIES:- For instance , a claim of a very big sum pending in a court of law against the
enterprise should be brought to the notice of the users of the financial statements, otherwise the
statements would be misleading.
If there is a change in the method of valuation of stock, or for providing depreciation or in making
provision for doubtful debts, it should be disclosed in the balance sheet by way of a footnote. Market
value of investments should be given by way of a footnote.

CONVENTION OF CONSISTENCY:- This convention states that accounting principles and methods should
remain consistent from one year to another. These should not be changed from year to year, in order to
enable the management to compare the Profit & Loss account and Balance sheet of the different periods
and drawimportant conclusions about the working of the enterprise. If a firm adopts different
accounting principles in two accounting periods, the profits of current period will not be comparable
with the profits of the preceding period.
But the convention of consistency should not be taken to mean that it does not allow a firm to change
the accounting methods according to the changed circumstances of the business. Otherwise, the
accounting will become non-flexible and the improved techniques of accounting will not be used. As
such, if the accountant feels that change in a particular method will lead to better disclosure of profits
and the financial position of the business the changed method may be adopted. However the nature
and effect of the change of method and justification for the change, must be stated clearly by way of
footnotes to enable the users of the financial statements to be aware of the change.

CONVENTION OF CONSERVATISM:- According to this convention, all anticipated lossess should be

recorded in the books of accounts, but all anticipated or unrealised gains should be ignored. In other
words, conservatism is the policy of playing safe. Provision is made for all known liabilities and lossess
even though the amount cannot be determined with certainity. Examples of the application of the
principle of conservatism include that closing stock is valued at cost price or realisable value whichever is
less, provision for doubtful debts is created in anticipation of actual bad debts, joint life insurance policy
is shown only at surrender value as against the amount paid. Provision for a pending law suit against the
firm, which may either be decided in its favour.
But this concept can have two effects i.e. profit & loss account will disclose lower profits in comparison
to the actual profits. Balance sheet will disclose understatement of assets and overstatement of liabilities
in comparison to the actual values.

CONVENTION OF MATERIALITY:- This concept stands as an exception to the convention of full

disclosure. According to this convention, items having an insignificant effect or being irrelevant to the
user need not to be disclosed. These unimportant items are either left out or merged with other items,
otherwise accounting statements will be unnecessarily overburdened. It should be noted that what is
material for one concern may be immaterial for another. For instance, the cost of small tools may be
material for a small repair workshop, but tge same figure may be immaterial for escorts limited.