Unit 1: Meaning and Scope of Accounting - 2 Chapter Notes | Accounting for CA Foundation PDF Download

Sub-Fields of Accounting

The various sub-fields of accounting are:

• Financial Accounting – This area focuses on the preparation and interpretation of financial statements, communicating them to users of accounts. It is historical, as it records transactions that have already occurred. The main outputs of financial accounting are the Profit and Loss Account and the Balance Sheet, which help determine the net result for a given accounting period and the financial position at a specific date. 
• Management Accounting – This field deals with internal reporting for business unit managers. To fulfill the functions of stewardship, planning, control, and decision-making, management requires various types of information. Management accounting encompasses different methods of organizing information and preparing reports as needed by managers. A significant component of management accounting is cost accounting, which focuses on cost determination and control. This area is explored in greater depth in advanced Chartered Accountancy courses. 
• Cost Accounting – According to the terminology defined by the Institute of Cost and Management Accountants of England, cost accounting is “the process of accounting for cost which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.” 
• Social Responsibility Accounting – This field has emerged due to a growing social awareness of the negative by-products of economic activities. Social responsibility accounting focuses on accounting for the social costs incurred by an enterprise and the social benefits generated. 
• Human Resource Accounting – This area attempts to identify, quantify, and report investments made in the human resources of an organization that are not typically accounted for under conventional accounting practices.

Users of Accounting Information

Generally, users of accounts are categorized into two groups: (a) internal users and (b) external users. Management accounting focuses on identifying the information needs and the methods to provide such information to management, while financial statements generally serve the information requirements of external users. Below are the various users of accounting information:

• Investors: They supply risk capital to the business and require information to evaluate whether to buy, hold, or sell their investments. They are also interested in the business's capability to survive, thrive, and pay dividends. In non-corporate sectors, where ownership and management are often intertwined, owners need information about the business's performance and financial position to decide whether to continue operations or shut down.
• Employees: Employees' growth is closely linked to the organization's growth. Therefore, they seek information about the enterprise's stability, continuity, and growth, as well as its ability to provide remuneration, retirement, and other benefits, and to create employment opportunities.
• Lenders: Lenders want to know if their loan principal and interest will be repaid on time.
• Suppliers and Creditors: These users are interested in the enterprise's ability to settle their dues, which influences their credit policies and rates. Additionally, they may have a vested interest in the long-term viability of the enterprise if their existence relies on it.
• Customers: Customers are concerned about the stability and profitability of the enterprise as their operations depend on the continuous supply of goods. For instance, if a company that supplies chemicals to pharmaceutical firms encounters issues and cannot deliver, it would also affect the customers.
• Government and Agencies: Governments regulate business operations for public welfare, allocate resources among competing enterprises, control pricing, and impose excise duties and taxes. Thus, they maintain a consistent interest in business enterprises.
• Public: The general public is interested in the activities of the enterprise, as it may significantly contribute to the local economy through employment and support for local suppliers.
• Management: Management is also interested in accounting information for various managerial decisions. Based on this information, management assesses the impacts of their decisions on the organization’s operations, aiding in future decision-making.

Relationship of Accounting with Other Disciplines

Accounting is closely related to several other disciplines, and thus, acquiring a good knowledge of accounting requires familiarity with relevant portions of these fields. In many instances, they overlap with accounting. An accountant should possess a working knowledge of related disciplines to comprehend overlapping areas and apply knowledge from other fields in their work or seek expert advice.

(a) Accounting and Economics:

• Economics is regarded as a science of rational decision-making regarding the use of scarce resources. It analyzes efficient resource use for satisfying human wants from both firm and national perspectives. Accounting, on the other hand, is a system that provides data to users for informed judgments and decisions, incorporating non-accounting data relevant for decision-making. There is significant overlap between accounting and economics, as accounting enhances management decision-making, while economic theories have influenced accounting decision-making tools. However, discrepancies exist between economists' and accountants' concepts of income and capital. Accountants adapted the ideas of value, income, and capital maintenance from economists for practical application, developing valuation and measurement techniques influenced by economic theories but tailored to meet specific accounting needs such as relevance, verifiability, and reliability.
• For instance, economists view the value of an asset as the present value of future earnings. However, estimating future earnings for a plant with a working life of over a hundred years poses challenges, leading accountants to adopt acquisition cost as a practicable valuation base. At the macro level, accounting provides the database for economic decision models, while micro-level accounting data contribute to this macro-level database. There are significant non-overlapping areas in accounting, such as the systems for recording, classifying, and summarizing transactions and events, harmonizing systems through uniform rules, and effectively communicating data.

(b) Accounting and Statistics:

• The role of statistics in accounting is better understood when considering the nature of accounting records. Accounting information is highly precise, but such precision is often unnecessary for decision-making, thus statistical approximations are utilized. In accounting, individual values are crucial as they pertain to business transactions, while statistics focus on typical values, behaviors, or trends over time. Consequently, statistical methods are applied when broad generalizations or averages are required.
• Accounting classifications of assets, liabilities, income, and expenditure are tailored to financial recording needs, while other classifications may be geographical or historical, depending on purpose. Generally, accounting records reflect a short-term view, while statistical analysis benefits from a longer-term perspective, such as establishing trend lines. Statistical methods leverage past accounting records for analysis, revealing functional relationships between variables that aid in estimating costs or prices based on future input price changes. Financial and other ratios in accounting are often based on statistical methods, providing averages over time, and various accounting calculations utilize statistical formulas. 
• Statistical techniques enhance the development and interpretation of accounting data, including time series and cross-sectional comparisons. Currently, multiple discriminant analysis is frequently employed to detect signs of business distress, highlighting the value of statistical methods in accounting.

(c) Accounting and Mathematics: 

• Double-entry bookkeeping can be expressed in algebraic terms; the first known text on the subject was part of an algebra treatise. A solid understanding of arithmetic and algebra is essential for accounting computations and measurements, including interest and annuity calculations. Mathematical techniques are frequently employed in areas such as depreciation computation, hire purchase installment calculations, loan repayment set-asides, and lease rental calculations. Additionally, accounting data is often presented in ratio form.
• With computerization, mathematics has become increasingly integral to accounting. Transactions can now be recorded in matrix form, applying matrix algebra rules for data classification and summarization. Nowadays, statistical and econometric models are widely used to develop decision models based on accounting data. Understanding mathematics is crucial for grasping the decision models created by statisticians, econometricians, and operations research experts. Additionally, graphs and charts are extensively utilized to communicate accounting information, making knowledge of geometry and trigonometry beneficial for comprehending the accounting communication system.

(d) Accounting and Law:

• An economic entity operates within a legal framework, where transactions with suppliers and customers are governed by various laws, including the Contract Act and the Sale of Goods Act. The entity itself is established and regulated by law, as seen with companies created and controlled by the Companies Act. Each country has its own set of economic, fiscal, and labor laws guiding transactions and events.
• Often, the accounting system must comply with legal prescriptions. For instance, the Companies Act mandates specific financial statement formats for companies, and banking, insurance, and utility services must produce financial statements as dictated by their governing legislation. However, legal requirements for accounting systems arise from advancements in accounting knowledge; legislation cannot emerge without corresponding development in the accounting discipline, illustrating the mutual influence between accounting and law.

(e) Accounting and Management: Management encompasses a broad range of functions and applies many disciplines, including those previously mentioned. Accountants play a crucial role within management teams, with a significant portion of accounting information generated for management decision-making. Although management relies on various data sources, accounting data serve as fundamental documents. An accountant's active role in management allows for a better understanding of data requirements, enabling the accounting system to be tailored to meet management's needs.

Limitations of Accounting

There are several misconceptions surrounding financial statements. Many people believe that an income statement accurately reflects the income or loss of a business, and that a balance sheet provides a completely accurate depiction of its financial status. It is important to recognize that accounting, as a language, has inherent limitations. The profit or loss figures produced by accounting are constrained by various factors within which the discipline operates. The assumptions and conventions that underpin accounting become its limitations. Financial statements are never devoid of subjective factors, as they largely result from the individual judgment of the accountant regarding the selection of accounting policies. Below are some examples:

• Factors that may be important for evaluating a business's worth are often absent from financial accounts because they cannot be quantified in monetary terms. For instance, the balance sheet does not capture the value of elements like employee loyalty and skills, which can be among the most significant assets of a business today.
• The balance sheet reflects the business's condition only on the date it is prepared, rather than providing a forward-looking view that users are interested in for both the near and long term, rather than just the past.
• Accounting does not account for fluctuations in certain monetary factors, such as inflation.
• There are instances where accounting principles may conflict with one another.
• Some accounting estimates rely heavily on the personal judgment of the accountant, such as provisions for doubtful debts, the method of depreciation used, the classification of certain expenditures as revenue or capital, and the choice of inventory valuation methods, among others.
• Financial statements only acknowledge assets that can be expressed in monetary terms. Human resources, although crucial to the enterprise, are not represented in the balance sheet, as there is no universally accepted method for valuing human resources in monetary terms.
• The existence of different accounting policies for the same item increases the potential for manipulation. Although various laws and accounting standards aim to minimize these options, they cannot be reduced to a single approach.

In summary, the language of accounting has specific practical limitations, and therefore, financial statements should be interpreted with caution, considering all the various factors that influence the true representation.

Role of Accountant in the Society

• Only a few professions in the world enjoy high regard in the public eye, and the accounting profession is undoubtedly one of them. Goethe referred to the accountant's profession as ‘the fairest invention of the human mind’. At the heart of all learned professions lies a commitment to public good and a quest to effectively serve society. Through the application of accountancy science and its artistic elements, accountants create a dynamic framework that aids businesses in planning their futures, transforming silent figures into meaningful insights. This capacity positions their profession as a catalyst for socio-economic change and societal welfare.
• An accountant, equipped with education, training, analytical skills, and experience, is highly qualified to deliver a range of need-based services to an ever-evolving society. Today's accountants competently handle not only taxation, costing, management accounting, financial layouts, and company legislation but also explore areas such as financial policies, budgetary strategies, and even economic principles. The scope of activities accountants can engage in is expansive, encompassing many additional dimensions.

Areas of Service

The practice of accountancy has extended beyond its traditional scope of preparing financial statements, interpreting them, and conducting audits. Accountants are now actively involved in corporate law, taxation, and general management issues. Below are some of the key services provided by accountants to society:

1. Maintenance of Books of Accounts: Accountants systematically record financial transactions to determine the net outcomes over a period and to present the financial position of an entity at a specific time. Accurate bookkeeping aids management in planning, decision-making, and control functions.
2. Statutory Audit: Limited companies must appoint a chartered accountant or a firm of chartered accountants as auditors, who are legally required to report annually on whether the balance sheet accurately reflects the state of affairs and whether the profit and loss account fairly represents the profit or loss for the year. Auditing is also required for other organizations due to legal mandates or owner preferences.
3. Internal Audit: This management tool involves internal auditors examining accounting transactions and the systems used for recording them. The aim is to ensure that accounts are accurately maintained and that systems are in place to prevent revenue loss or asset misappropriation, while also aligning operations with management plans. Internal auditing now serves as a means of enhancing business operational efficiency.
4. Taxation: Accountants manage taxation issues for businesses and individuals, representing them before tax authorities and assisting in the settlement of tax liabilities. They also engage in tax planning to help minimize tax burdens and contribute insights on broader tax policies and their implications on business and the economy.
5. Management Accounting and Consultancy Services: Management accountants play an advisory role, responsible for internal reporting to assist in planning and controlling operations, decision-making on special issues, and developing long-term strategies. They analyze, interpret, and present accounting data beneficial to management, providing consultancy on management information systems, expenditure control, investment appraisals, and corporate planning.
6. Financial Advice:Accountants provide guidance on personal financial matters, including: 
   • Investments: They help clients understand shareholder documents and make informed investment decisions.
   • Insurance: Accountants inform clients about various insurance policies and assist in policy selection.
   • Business Expansion: As businesses grow, accountants help interpret accounts, suggest schemes, evaluate proposals, and advise on financing options, including negotiations with foreign partners.
   • Investigations: Financial investigations are conducted for various purposes, such as assessing a business's financial position, determining the feasibility of manufacturing versus purchasing, analyzing profit declines, enhancing management efficiency, and investigating fraud.
   • Pension Schemes: While actuaries and insurance agents provide specialist advice on pension schemes, accountants must be consulted for final decisions and subsequent management of these schemes.
7. Other Services:
   • Secretarial Work: Accountants often handle secretarial duties for companies, clubs, and associations.
   • Share Registration Work: Many companies engage accountants for share transfer and new issue registration tasks.
   • Company Formation: Accountants assist in company formation alongside legal advisors or provide guidance against it.
   • Receiverships, Liquidations, etc.: Accountants may take on the roles of liquidators or receivers when companies are wound up or loans default.
   • Arbitrations: Accountants can act as arbitrators in disputes when invited.
   • Cost Accounts: Cost accountants continuously report cost-related information to management.
   • Accountant and Information Services: Effective accountants provide timely, clear information and develop systems for regular information flow to enhance comparability in financial statements across businesses and years.

With the rise of computerized information systems, accountants face new responsibilities, but their outputs are gaining increased attention and respect.

Chartered Accountant in Industry 

An accountant, despite being part of the top planning team, is not a planner within an industry. His role involves collaborating with functional departments to express the organization's goals in financial terms. Consequently, he must conduct an in-depth analysis of the business and its personnel in functional areas, including engineers and sales staff. A qualified accountant can significantly contribute to critical business functions related to accounting, costing, budgetary control, estimating, and treasury management. 

Chartered Accountant in Public Sector Enterprises 

Public sector enterprises have become a distinctive aspect of the national economy in both developed and developing countries. Consequently, financial and budgetary control, as well as accounting, auditing, and reporting systems, have garnered significant interest and concern nationwide, extending beyond merely a limited group of shareholders. The accounting practices utilized by these corporations or companies differ from standard government accounting. Accountants are responsible for preparing the accounts and reports of these public corporations in a manner that informs the general public about the validity of the items presented in various records and financial statements, justifying their existence. 

Chartered Accountant in Framing Fiscal Policies 

Accountants play a constructive role in shaping appropriate fiscal policies and promoting trade, commerce, and industry. They should innovate new methods and ready themselves for emerging service areas, reflecting their dedication to public goods and services. A business can only thrive commercially when accounting and business acumen are integrated. It is a social responsibility for accountants in both industry and practice to provide more comprehensive information about corporate outcomes. The overall economic condition can only be understood when this consolidated corporate information is made available.

Chartered Accountant and Economic Growth

In today's world, accountants should view their responsibilities as expansive as the circumstances demand and not limit themselves to mere adherence to the law. Their goal should be to prevent any individual from profiting at the nation's expense. Accountants must embrace a proactive role, striving to promote efficiency within individual businesses and support the social objectives that are fundamental to a welfare state. 

Summary

• “Accounting is the art of recording, classifying, and summarising 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 result thereof.” 
• Accounting procedure can be basically divided into two parts:
  (i) Generating financial information and
  (ii) Using the financial information. 
• The objectives of accounting can be given as follows:
  (i) Systematic recording of transactions
  (ii) Ascertainment of results of above recorded transactions
  (iii) Ascertainment of the financial position of the business
  (iv) Providing information to the users for rational decision-making
  (v) To know the solvency position
  The main functions of accounting are as follows:
  (i) Measurement
  (ii) Forecasting
  (iii) Decision-making
  (iv) Comparison & Evaluation
  (v) Control
  (vi) Government Regulation and Taxation 
• Objectives of Book-keeping:
  (i) Complete Recording of Transactions and
  (ii) Ascertainment of Financial Effect on the Business 
• The various sub-fields of accounting are:
  (i) Financial Accounting
  (ii) Management Accounting
  (iii) Cost Accounting
  (iv) Social Responsibility Accounting
  (v) Human Resource Accounting 
• The various users of accounting information:
  (i) Investors
  (ii) Employees
  (iii) Lenders
  (iv) Suppliers and Creditors
  (v) Customers
  (vi) Government and their agencies
  (vii) Public
  (viii) Management 
• Accounting is closely related with several other disciplines and thus to acquire a good knowledge in accounting one should be conversant with the relevant portions of such disciplines. 

An accountant with his education, training, analytical mind and experience is best qualified to provide multiple need-based services to the ever growing society. The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial lay-out, company legislation and procedures but they can delve deep into the fields relating to financial policies, budgetary policies and even economic principles.