Scope of Accounting• Accounting 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 institutions 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.

• As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions.As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems

Definition of Accounting

1.H.Chakravorty: “Accountancy is the science of recording, classifying and summarizing transactions so that relation with outsiders is exactly determined and result of operation during a particular period can be calculated, and the financial position as the end of the period may be shown.2.A.I.C.P.A.: "Accountancy may be defined as 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".

Importance of accounting Information

• Accounting is a service activity, its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions, in making reasoned choices among alternative courses of actions.

Decisions based on accounting information:

1. When to buy, hold or sell the investments especially in equity capital of an enterprise?

2. Assessment of the accountability of the management.

3. Assessment regarding the ability of the management to pay salaries, other benefits like bonus to its employees.

4. Assessment of the security for the amounts lent to the enterprise.

5. Determination of the ability to distribute dividends and bonus shares.

6. Regulation of the activities of the enterprise.

Accounting is a science or not

Whether accounting can be considered as a science is a debatable question. Science always consists of some generally accepted and well established principles. The principles may be modified as and when required but then also, a logical explanation ending in a conclusive proof is necessary. Accounting is systematic method of summarsing, classification, condensation and recording of day to day transactions. It also calculates the profits or loss of a business unit during a certain period. So we see there is a systematic and well conceived of conceptual frame work.

Accounting principles and postulates are based on sound reasoning. These have developed out of practical usage, customs and conventions. So these principles have originated out of real experience. For these reasons accounting can be said to be not a pure science or a complete science because like general science or Natural Science However, accounting is a behavioral science.

Users of Accounting information

The users of information may be divided into two distinct classes:1. Internal users like managers and the persons who are strictly related to the day –to-day affairs of the business.2.External users, like the government authorities, labor unions, researchers etc.

Users of Accounting information

: 1. Proprietors, Partners, and Shareholders etc: These persons are always interested to know how much profit they can earn out of the particular business. Moreover, they are interested in the stability of the business in which they have invested their capital. They can know all these with the help of the information supplied by the accountant.2. Money lenders: These persons want to know the stability of the business, interest-paying capacity of the business and also its ability to repay the principal amount of their loan.

  3. Creditors: Creditors would always like to gather definite information regarding the financial solvency of the business before granting any credit. The financial positions of any business can be known from the various published accounts.4. Prospective Investors: Investors are interested in the continuity and stability of the business. That any business is sound and secure may be known from the various information furnished by the accountant.

5 Public: The interested common men can also have some knowledge about the value of shares, debentures etc. and also about the financial strength of the concern from the accounts

6.. Employees and trade unions: In the interest of their movements, employees’ organizations and trade-unions should be always aware of the financial position of the industry and the organization in particular.

Users of information

7.Government: The Central, state and sometimes the Local Self Government want to have authoritative control over the industrial organizations and business units for the greater interest of the public. When or at what point of time and condition such restrictive measures should be imposed to serve the interest of the common people best, can be easily known from the information supplied by the accounts.8. Tax-authorities: The final accounts help the tax –gathers and authorities in calculating and imposing proper taxes and their collection.9.. Economists and Researchers; The Economist and Researchers also need the help of various types of information for their research-work and thesis.

Basic concepts underlying financial Accounting

• Entity concept • Dual aspect concept • Money measurement concept• Going concern concept• Cost concept• Conservatism concept: It takes into

consideration all prospective losses but leaves all prospective profits.for e.g; depreciation, provision for bad debts.

FINANCIAL ACCOUNTING

• The term ‘Accounting’ unless otherwise specifically stated always refers to ‘Financial Accounting’. Financial Accounting is commonly carries on in the general offices of a business. It is concerned with revenues, expenses, assets and liabilities of a business house. Financial Accounting has two-fold objective, viz,

• To ascertain the profitability of the business, and • To know the financial position of the concern.

MEANING OF FINANCIAL ACCOUNTING

• MEANING OF ACCOUNTING:• Accounting is the process of recording, classifying, summarizing,

analyzing and interpreting the financial transactions of the business for the benefit of management and those parties who are interested in business such as shareholders, creditors, bankers, customers, employees and government. Thus, it is concerned with financial reporting and decision making aspects of the business.

• The American Institute of Certified Public Accountants Committee on Terminology proposed in 1941 that accounting may be defined as, “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 a financial character and interpreting the results thereof”.

NATURE AND SCOPE OF FINANCIAL ACCOUNTING:

• Deals with financial transactions: Accounting as a process deals only with those transactions which are measurable in terms of money. Anything which cannot be expressed in monetary terms does not form part of financial accounting however significant it is.

• Recording of information: Accounting is an art of recording financial transactions of a business concern. Therefore, the information is recorded in a set of books called Journal and other subsidiary books. It is also refereed as historical form of accounting.

• Classification of Data: The recorded data is arranged in a manner so as to group the transactions of similar nature at one place so that full information of these items may be collected under different heads. This is done in the book called ‘Ledger’. .

• Summarizes: The classified information of the trial balance is used to prepare profit and loss account and balance sheet in a manner useful to the users of accounting information. The final accounts are prepared to find out operational efficiency and financial strength of the business.

• Analyzing: It is the process of establishing the relationship between the items of the profit and loss account and the balance sheet.

• Interpreting the financial information: It is concerned with explaining the meaning and significance of the relationship established by the analysis.

• Communicating the results: The profitability and financial position of the business as interpreted above are communicated to the interested parties at regular intervals so as to assist them to make their own conclusions

Objectives of Financial Accounting

The broad objectives of Financial Accounting are as follows:1.To maintain the cash accounts through the Cash Book and to find out the Cash balance on any particular day.2.To maintain various other Journals for recording day-to –day non –cash transactions.3.To maintain various Ledger Accounts to find out the exact amounts of incomes and expenses or gain and losses or receivables and payables.4.To furnish information regarding Purchases and Sales, both Cash and on Credit.5.To find out the net profit or net loss or surplus or deficit for any particular period.6.To find out the total capital on a particular date.7.To find out the positions of assets on a particular date.8.To find out the position of liabilities on a particular date.9.To detect the frauds and misappropriations of money.10.To detect the various errors and to rectify those through entries in the journal proper.11.To confirm about the arithmetical accuracy of the books of accounts.12.To help the management by supplying accounting ratios, reports and relevant data.

Functions of Financial Accounting

• Maintaining systematic records.• Communicating The financial results: net profit or loss,

assets, liabilities, etc.• Meeting legal needs• Protecting business assets• Fixing responsibility• Forecasting• Measurement• Decision making• Evaluation• Control

Advantages of Financial accounting

• Assistance to management

• Records rather than memory

• Intra-period comparisons

• Aid in legal matters

• Help in taxation matters

• Sale of business.

LIMITATIONS OF FINANCIAL ACCOUNTING

• It does not tell about the optimum profit and does not provide the ways and means to increase the profits.

• In case of loss, whether loss can be reduced or converted into profit by means of cost control and cost reduction? Financial accounting does not answer this question.

• It does not provide the cost of products manufactured • It provides ample scope for manipulation like

overvaluation or undervaluation. This possibility of manipulation reduces the reliability.

• It is technical in nature. A person not conversant with accounting has little utility of the financial accounts

LIMITATIONS OF FINANCIAL ACCOUNTING

• It records only quantitative information. • It records only the historical cost. The impact of future uncertainties

has no place in financial accounting. • It does not take into account price level changes. • It provides information about the whole concern. Product-wise,

process-wise, department-wise or information of any other line of activity cannot be obtained separately from the financial accounting.

• Cost figures are not known in advance. Therefore, it is not possible to fix the price in advance.

• As there is no technique for comparing the actual performance with that of the budgeted targets, it is not possible to evaluate performance of the business

Definition of Cost Accounting

• It is a method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting.

• The Institute of Cost and Works Accountants, India defines cost accounting as, “the technique and process of ascertainment of costs. Cost accounting is the process of accounting for costs, which begins with recording of expenses or the bases on which they are calculated and ends with preparation of statistical data”. To put it simply, when the accounting process is applied for the elements of costs (i.e., Materials, Labour and Other expenses), it becomes Cost Accounting.

SCOPE OF COST ACCOUNTING:

• Cost accounting is concerned with ascertainment and control of costs. Initially, cost accounting confined itself to cost ascertainment and presentation of the same mainly to find out product cost. With the introduction of large scale production, the scope of cost accounting was widened and providing information for cost control and cost reduction has assumed equal significance along with finding out cost of production. Cost accounting covers cost classification, recording , allocation, determination and reporting.

• Cost accounting guides ascertainment of cost of production. Cost accounting discloses profitable and unprofitable activities. It helps management to eliminate the unprofitable activities. It provides information for estimate and tenders. It discloses the losses occurring in the form of idle time spoilage or scrap etc.It helps to make effective control over inventory and for preparation of interim financial statements. It helps in controlling the cost of production with the help of budgetary control and standard costing. Cost accounting provides data for future production policies.

Nature of cost accounting

• It is a branch of knowledge: It is an organized body of knowledge consisting of its own principles, concepts and conventions.

• It is a science: It is a systematic knowledge which is also related to law, office practice and procedures,data processing, production and material control.

• It is an art: As it requires ability and skills on the part of cost accountant in applying the principles, methods and techniques of cost accounting to various mgt. problems.

• It is a profession

Need of Cost Accounting

• To overcome limitation of financial accounting.

• To make optimum utilization of resources.

• To achieve overall efficiency of business.

OBJECTIVES OF COST ACCOUNTING

The main objectives of cost accounting are as follows:-• Cost Ascertainment: The main objective of cost accounting is to find out the cost of

product, process, job, contract, service or any unit of production. It is done through various methods and techniques.

• Cost Control: The very basic function of cost accounting is to control costs. Comparison of actual cost with standard cost reveals the discrepancies (Variances).

• Cost Reduction: Cost reduction refers to the real and permanent reduction in the unit cost of goods manufactured or services rendered without affecting the use intended. It can be done with the help of techniques called budgetary control, standard costing, material control, labour control and overheads control.

• Fixation of Selling Price: The price of any product consists of total cost and the margin required. Cost data are useful in the determination of selling price. .

• Framing business policy:. Break even analysis, cost volume profit relationships, differential costing, etc are helpful in taking decisions regarding key areas of the business.-make or buy decisions

Advantages of C.A.

• Fixing of responsibility

• Measuring economic performance

• Fixation of Price

• Aids in Decision Making

• Helps in minimizing wastage and losses.

• Assist in Increasing profits.

LIMITATIONS OF COST ACCOUNTING:

• It is based on estimation: as cost accounting relies heavily on predetermined data, it is not reliable.

• No uniform procedure in cost accounting: as there is no uniform procedure, with the same information different results may be arrived by different techniques of cost accounts.

• Large number of conventions and estimate: There are number of conventions and estimates in preparing cost records such as materials are issued on an average (or) standard price, overheads are charged on percentage basis. .

• Formalities are more: Many formalities are to be observed to obtain the benefits of cost accounting. Therefore, it is not applicable to small and medium firms.

• Expensive: Cost accounting is expensive and requires reconciliation with financial records.

• It is unnecessary: Cost accounting is of recent origin and an enterprise can survive even without cost accounting.

• Secondary data: Cost accounting depends on financial statements for a lot of information. Any errors in that information creep into cost accounts also

Management Accounting

• The American Accounting Association defines Management Accounting as “the methods and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances”.

• The Institute of Chartered Accountants of India defines Management Accounting as follows: “Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively has come to be known as management accounting”

OBJECTIVES OF MANAGEMENT ACCOUNTING

• Planning and policy formulation: Management accounting can help on the basis of available information in setting goals; framing polices determining the alternative courses of action and deciding on the programme of activities. It facilitates the preparation of statements in the light of past results and gives estimation for the future.

• Interpretation of data:. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.

• Assists in Decision-making process: With the help of various modern techniques management accounting makes decision-making process more scientific. Data relating to cost, price, profit and savings for each of the available alternatives are collected and analyzed and provides a base for taking sound decisions

OBJECTIVES OF MANAGEMENT ACCOUNTING

• Controlling:.Cost control is effected through the use of standard costing and departmental control is made possible through the use of budgets.

• Reporting: Management accounting keeps the management fully informed about the latest position of the concern through reporting.

• Facilitates in Organizing: Since management accounting stresses more on Responsibility Centres with a view to control costs and responsibilities, it also facilitates decentralization to a greater extent. Thus, it is helpful in setting up effective and efficient organization framework.

• Facilitates Coordination of Operations: Management accounting provides tools for overall control and coordination of business operations.

NATURE AND SCOPE OF MANAGEMENT ACCOUNTING

• Provides accounting information: it provides necessary information to different levels of management. Management accounting involves the presentation of information in a way it suits managerial needs.

• Cause and effect analysis: The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss; management accounting goes a step further. Management accounting discusses the cause and effect relationship.

• Use of special techniques and concepts: Management accounting uses special techniques and concepts according to necessity to make accounting data more useful. The techniques usually used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal

NATURE AND SCOPE OF MANAGEMENT ACCOUNTING

• Taking important decisions: It supplies necessary information to the management which may be useful for its decisions. The historical data is studied to see its possible impact on future decisions.

• Helps in achieving objectives: Comparing actual performance with targeted figures will give an idea to the management about the performance of various departments. When there are deviations, corrective measures can be taken

• No fixed norms: No specific rules are followed in management accounting as that of financial accounting. The presentation will be in the way which suits the concern most.

• Increase in efficiency. The performance appraisal will enable the management to pin-point efficient and inefficient spots.

NATURE AND SCOPE OF MANAGEMENT ACCOUNTING

• Supplies information and not decision: Management accountant only guide and not supply decisions. The data is to be used by the management for taking various decisions. ‘How is the data to be utilized’ will depend upon the caliber and efficiency of the management.

• Concerned with forecasting: The historical information is used to plan future course of action. The information is supplied with the object to guide management for taking future decisions

LIMITATIONS OF MANAGEMENT ACCOUNTING:

• Limitations of Accounting Records: Management accounting derives its information from financial accounting ,cost accounting and other records. It is concerned with the rearrangement or modification of data. The correctness or otherwise of the management accounting depends upon the correctness of these basic records.

• It is only a Tool: It is a mere tool for management. Ultimate decisions are being taken by management and not by management accounting.

• Heavy Cost of Installation: The installation of management accounting system needs a very elaborate organization.

• Personal Bias: Personal prejudices and bias affect the objectivity of decisions

BRANCH ACCOUNTING MEANING

The dictionary meaning of the word branch is any subordinate division of a business, subsidiary shop, office etc. Acc to the provisions contained in sec29 of the Companies Act 1956 it would appear that a branch is any establishment carrying on either the same or substantially the same activity as that carried on by head office of the company.

OBJECTIVES OF BRANCH ACCOUNTING

The following are the main objectIives of maintaining branch accounts:(i) To know the Profit or loss of each branch (ii) They help in controlling branches(iii) Actual financial position of the business can be found out on the basis of head office and branch accounting records.(iv) Branch requirements of goods and cash can be estimated(v) To give Suggestions for increasing the efficiency of the branch can be sent on the basis of branch accounts. (vi) To help in complying with the requirements of law according to companies act 1956.

BRANCH ACCOUNTING• TYPES OF BRANCHES

From the accounting point of view, branches may be classified into (1) Dependent Branch(2) Independent Branch

•(1) Dependent Branch: They may sell the goods merely for cash or for credit also. The proceeds are sent or remitted directly to the head office daily or at periodicals intervals. An account is usually opened with a local bank where sale proceeds are deposited by the branch. The branch manager is provided with a small amount of cash on the imprest system for meeting day to day petty items of expenses. In case of credit sales, the debtors accounts are also kept by the branch.The term ‘Dependent Branch’ means a branch which does not maintain its own set of books. All records have to be maintained by the head office. When the business policies and the administration of a branch are wholly controlled by the head office, its accounts also are maintained by it.In such a case, Branch accounts are written up at the head office out of reports and returns received from the branch.

Joint Venture

A joint venture is a temporary partnership of two or more persons engaged in any particular business adventure of enterprise of short or seasonal duration . As the parties to a joint venture do business in union with others, they also share profit or loss between themselves in some agreed proportion.

Features of joint ventures

1. It is an agreement between two or more persons.2. No specific name of the firm is necessary for a joint

venture business.3. The objective is execution of a specific work.4. The venture share profits and losses in agreed ratio, in

the absence of any agreement, it is assumed to be equal.

5. The venture comes to an end as soon as venture is completed.

6. The venture may do any type of business of their own during the course of the venture.

Joint Venture- FormsJointly controlled operations• Jointly controlled operations involve the use of assets and other resources

of the venturers rather than the establishment of a separate entity. Each venturer uses its own assets, incurs its own expenses and liabilities, and raises its own finance.

• IAS 31 requires that the venturer should recognise in its financial statements the assets that it controls, the liabilities that it incurs, the expenses that it incurs, and its share of the income from the sale of goods or services by the joint venture.

Jointly controlled assets• Jointly controlled assets involve the joint control, and often the joint

ownership, of assets dedicated to the joint venture. Each venturer may take a share of the output from the assets and each bears a share of the expenses incurred.]

• IAS 31 requires that the venturer should recognise in its financial statements its share of the joint assets, any liabilities that it has incurred directly and its share of any liabilities incurred jointly with the other venturers, income from the sale or use of its share of the output of the joint venture, its share of expenses incurred by the joint venture and expenses incurred directly in respect of its interest in the joint venture.

Jointly controlled entities• A jointly controlled entity is a corporation,

partnership, or other entity in which two or more venturers have an interest, under a contractual arrangement that establishes joint control over the entity.

• Each venturer usually contributes cash or other resources to the jointly controlled entity. Those contributions are included in the accounting records of the venturer and recognised in the venturer's financial statements as an investment in the jointly controlled entity.

Benefits of joint venture

• Sharing of risk.

• Financial resources

• Sufficient experience

• Efficiency

• Utilization of resources

• Higher Profits

Joint Venture

There are two methods in which joint venture accounts can be kept These are:

• Where no separate books are kept to record joint venture transactions.

• Where separate set of books is kept to record the transactions.

Joint VentureWhen No Separate Books Are Kept When the goods bought on the joint venture account are sold: Cash or purchaser's account     To Joint venture account• When money is received on joint venture: Bank or cash     To Joint venture account • If money is received by the other party on account of joint venture: Other party's account      To Joint venture account• If any special commission is received on account of joint venture: Joint venture account     To Commission account

Joint Venture

When No Separate Books Are Kept

When the joint venture account will show a profit or loss. The profit will be divided in the agreed proportions.

The entry is:

Joint venture account  

  To Other party's account   

To Profit and loss account

(In case of loss the entry will be reversed.)