| Accounting vs. Book-keepingBook-keeping | | | | do not suggest that accounting is free from |
| concerns itself with the recording (correctly and in | | | | limitations. |
| a set of books) of those transactions that result | | | | Following are the limitations: |
| in the transfer of money or money's worth. | | | | Financial accounting permits alternative |
| Whereas accounting is comprehensive in | | | | treatmentsAccounting is based on concepts and it |
| perspective. It extends to classifying, summarizing, | | | | follows " generally accepted principles" but there |
| presenting and even analyzing accounting | | | | exist more than one principle for the treatment |
| information . | | | | of any one item. This permits alternative |
| Accounting vs. Accountancy | | | | treatments with in the framework of generally |
| Body of knowledge (consisting of principles, | | | | accepted principles. For example, the closing stock |
| postulates, assumptions, conventions, concepts | | | | of a business may be valued by anyone of the |
| and rules) governing the science of recording | | | | following methods: FIFO (First-in- First-out), LIFO |
| classifying and analyzing financial transactions is | | | | (Last-in-First-out), Average Price, Standard Price |
| accounting. Whereas the practice and art of the | | | | etc., but the results are not comparable. |
| science of accounting is termed as | | | | Financial accounting does not provide timely |
| accountancy.To meet the ever increasing | | | | information |
| demands made on accounting by different | | | | It is not a limitation when high powered software |
| interested parties (such as owners, management, | | | | application like HiTech Financial Accenting are used |
| creditors, taxation authorities etc.) the various | | | | to keep online and concurrent accounts where the |
| branches have come into existence. Financial | | | | balance sheet is made available almost |
| AccountingThe object of financial accounting is to | | | | instantaneously. However, manual accounting does |
| ascertain the result (profit or loss) of business | | | | have this shortcoming. |
| operations during the particular period and to state | | | | Financial accounting is designed to supply |
| the financial position (Balance Sheet) as on a date | | | | information in the form of statements (Balance |
| at the end of the period. | | | | Sheet and Profit and Loss Account) for a period |
| Cost Accounting | | | | normally one year. So the information is, at best, |
| The object of cost accounting is to find out the | | | | of historical interest and only 'post-mortem' |
| cost of goods produced or services rendered by | | | | analysis of the past can be conducted. The |
| a business. It also helps the business in controlling | | | | business requires timely information at frequent |
| the costs by indicating avoidable losses and | | | | intervals to enable the management to plan and |
| wastes.Management AccountingThe object of | | | | take corrective action. For example, if a business |
| management accounting is to supply relevant | | | | has budgeted that during the current year sales |
| information at appropriate time to the | | | | should be $ 12,00,000 then it requires information |
| management to enable it to take decision and | | | | whether the sales in the first month of the year |
| effect control.In this web primer, we are | | | | amounted to $ 10,00,000 or less or more? |
| concerned only with financial accounting. The | | | | Traditionally, financial accounting is not supposed to |
| objects of financial accounting as stated above | | | | supply information at shorter interval less than |
| can be achieved only by recording the financial | | | | one year. With the advent of computerized |
| transactions in a systematic manner according to | | | | accounting now a software like HiTech Financial |
| a set of principles. The recorded information has | | | | Accounting displays monthly profit and loss |
| to be classified, analyzed and presented in a | | | | account and balance sheet to overcome this |
| manner in which business results and financial | | | | limitation. Financial accounting is influenced by |
| position can be ascertained. | | | | personal judgments'Convention of objectivity' is |
| Uses of Accounting | | | | respected in accounting but to record certain |
| Accounting plays important and useful role by | | | | events estimates have to be made which |
| developing the information for providing answers | | | | requires personal judgment. It is very difficult to |
| to many questions faced by the users of | | | | expect accuracy in future estimates and |
| accounting information. | | | | objectivity suffers. For example, in order to |
| (1) How good or bad is the financial condition of | | | | determine the amount of depreciation to be |
| the business? | | | | charged every year for the use of fixed asset it |
| (2) Has the business activity resulted in a profit or | | | | is required estimation and the income disclosed by |
| loss? | | | | accounting is not authoritative but 'approximation'. |
| (3) How well the different departments of the | | | | Financial accounting ignores important |
| business have performed in the past? | | | | non-monetary information |
| (4) Which activities or products have been | | | | Financial accounting does not consider those |
| profitable? | | | | transactions of non- monetary in nature. For |
| (5) Out of the existing products which should be | | | | example, extent of competition faced by the |
| discontinued and the production of which | | | | business, technical innovations possessed by the |
| commodities should be increased. | | | | business, loyalty and efficiency of the employees; |
| (6) Whether to buy a component from the | | | | changes in the value of money etc. are the |
| market or to manufacture the same? | | | | important matters in which management of the |
| (7) Whether the cost of production is reasonable | | | | business is highly interested but accounting is not |
| or excessive? | | | | tailored to take note of such matters. Thus any |
| (8) What has been the impact of existing policies | | | | user of financial information is, naturally, deprived |
| on the profitability of the business? | | | | of vital information which is of non-monetary |
| (9) What are the likely results of new policy | | | | character. In modern times a good accounting |
| decisions on future earning capacity of the | | | | software with MIS and CRM can be most useful |
| business? | | | | to overcome this limitation partially. |
| (10) In the light of past performance of the | | | | Financial Accounting does not provide detailed |
| business how it should plan for future to ensure | | | | analysis |
| desired results ? | | | | The information supplied by the financial |
| Above mentioned are few examples of the types | | | | accounting is in reality aggregates of the financial |
| of questions faced by the users of accounting | | | | transactions during the course of the year. Of |
| information. These can be satisfactorily answered | | | | course, it enables to study the overall results of |
| with the help of suitable and necessary | | | | the business the information is required regarding |
| information provided by accounting. | | | | the cost, revenue and profit of each product but |
| Besides, accounting is also useful in the following | | | | financial accounting does not provide such detailed |
| respects :- | | | | information product- wise. For example, if business |
| (1) Increased volume of business results in large | | | | has earned a total profit of say, $ 5,00,000 during |
| number of transactions and no businessman can | | | | the accounting year and it sells three products |
| remember everything. Accounting records obviate | | | | namely petrol. diesel and mobile oil and wants to |
| the necessity of remembering various | | | | know profit earned by each product Financial |
| transactions. | | | | accounting is not likely to help him unless he uses |
| (2) Accounting record, prepared on the basis of | | | | a computerized accounting system capable of |
| uniform practices, will enable a business to | | | | handling such complex queries. Many reports in a |
| compare results of one period with another | | | | computer accounting software like HiTech Financial |
| period. | | | | Accounting which are explained with graphs and |
| (3) Taxation authorities (both income tax and | | | | customized reports as per need of the business |
| sales tax) are likely to believe the facts contained | | | | overcome this limitation. |
| in the set of accounting books if maintained | | | | Financial Accounting does not disclose the present |
| according to generally accepted accounting | | | | value of the business |
| principles. | | | | In financial accounting the position of the business |
| (4) Cocooning records, backed up by proper and | | | | as on a particular date is shown by a statement |
| authenticated vouchers are good evidence in a | | | | known as 'Balance Sheet'. In Balance Sheet the |
| court of law. | | | | assets are shown on the basis of "Continuing |
| (5) If a business is to be sold as a going concern | | | | Entity Concept. Thus it is presumed that business |
| then the values of different assets as shown by | | | | has relatively longer life and will continue to exist |
| the balance sheet helps in bargaining proper price | | | | indefinitely, hence the asset values are 'going |
| for the business. | | | | concern values.' The 'realized value' of each asset |
| Limitations of Financial Accounting | | | | if sold to-day can't be known by studying the |
| Advantages of accounting discussed in this section | | | | balance sheet. |