ALL ABOUT ACCOUNTING
Accounting is defined as the process of recording, summarizing, reporting, and analyzing financial data. To better understand what accounting truly means, let's begin to know its components:
1) Recording
The main purpose of accounting is to keep track of every transaction that the company does. Bookkeeping is the process of identifying what counts as a transaction and recording that information.
Compared to accounting, bookkeeping is more focused on the recording portion. A set of books is kept by accountants for the purpose of recording. Their processes are quite organized. In the modern day, computers are used to automatically account for transactions as they take place.
2)Summarizing
Raw data is produced when transactions are recorded. A company's ability to make decisions with tons of raw data is limited. Accountants divide data into categories as a result. The chart of accounts specifies these groups. Two things happen as and when transactions take place: first, an individual record is created, and second, the summary record is updated.
A sale to Mr. X for Rs. 100, for instance, would show up as:
Sale of Rs. 100 to Mr. X
Increasing the total sales to 600 from 500
3) Reporting
Concerning the status of the firm, management must respond to the investors. The operations that are being sponsored with the owners' money must be reported to them on a regular basis. Periodic reports are thus issued to them for this reason.
These reports are often issued on a quarterly basis, and there is one yearly report that includes a performance summary for all four quarters. Typically, reporting takes the form of financial statements. Government agencies oversee these financial statements to prevent fraudulent financial reporting.
4) Analyzing
The final step in accounting is performing a results analysis. Meaningful conclusions must be made when the results have been compiled and communicated. Management must identify both its advantages and disadvantages. By using comparison, accounting aids in this. It is customary to contrast earnings, cash, sales, assets, etc. with one another in order to assess how well the company is performing.
Objectives Of Accounting
Every action a corporate entity does must have a purpose, and accounting is no different. The use of accounting aids the business in achieving several goals. The following is the list of objectives
- Permanent Record - A permanent record of all the transactions that a company entity engages in is required. These documents may be needed for internal purposes, tax purposes, or for other reasons. This purpose is served by accounting. Every time an organization commits a resource with a monetary value, whether it is used internally or outside, a record is kept. This indelible record is stored for years and is retrievable as and when required.
- Measurement Of Outcome - A company organization could engage in a lot of transactions every day. It could be profitable in some of these transactions while losing money in others. But over time, all of these transactions' combined effects must be taken into account. Daily, weekly, and monthly reports that tell the organization how successfully it is carrying out its operations are required. Accounting does this by delivering regular financial statements that enable the company to make necessary operational adjustments.
- Creditworthiness - Resources are necessary for a company to function. They need to buy capital stock from investors because they don't currently have any. Only until investors are reasonably confident in the company's ability to turn a profit will they invest money in it. Past accounting records are quite helpful in demonstrating this. Before entrusting the management with their money, all types of investors, from banks to shareholders, want prior accounting information.
- Efficient Use Of Resources - With the use of accounting data, businesses may also carry out a beneficial internal analysis. Accounting records provide the company with information on what resources were allocated to which activities at what times. These records also include a summary of the revenue generated by these actions. Management may then reflect on prior actions and learn from them in order to improve performance and make better use of resources.
Limitation Of Accounting
- Subjective Measurement - Every transaction or event that has occurred within the organization must have a monetary value assigned to it by the accountants. Sometimes it is impossible to determine the transaction's monetary worth. Take the example of depreciation. Accountants can only offer best-case scenarios on the depreciation that should have occurred given the size of activities. These projections, however, are frequently wildly inaccurate. As a result, accounting principles are subject to manipulation and controversy.
- Qualitative Factors - Everything has a monetary worth in the eyes of accountants. They don't account for the items that have no monetary worth! Think about the instance of benevolence. It is not possible to account for goodwill until the organization has made a clear payment for the goodwill it acquired from another business. The internal goodwill that the company has created is worthless, according to accountants. Since we are all aware that this is not the case, accounting for goodwill is incorrect.
- Unstable Unit Of Account - All transactions must be measured in a single unit of account by accountants. The money that is typically utilized in a country serves as this unit of account. Nevertheless, it is well known that currency values fluctuate. Currency values are dynamic due to causes like inflation, deflation, and other factors. Accountants create a skewed picture when they express assets bought with rupees from the previous year in the same unit as assets bought with rupees from this year. Because their assets were bought decades ago during deflationary times, many businesses have low book values.