Gr 11

1. BOOK KEEPING,
ACCOUNTING &
ACCOUNTANCY
JEEVAN VARMA
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2. Book keeping, accounting, and
accountancy
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Bookkeeping means recording all business transactions (e.g., sales, purchases,
payments, etc.) in the books of prime entry. It is similar to journaling when you
record everything that happened throughout the day, but in a predefined format.
While these records are essential for producing financial statements, this part of
work is mostly routine and is first to be automated in the accounting department.
Accounting is a broader term, it includes bookkeeping and reporting. Reporting
is a more complex process involving analyzing, interpreting and summarizing
financial data and presenting the results in the form of a report. The outcome is
either financial statements for financial reporting or management reports for
management reporting.
Accountancy usually relates to a professional practice, i.e. a consultancy
providing accounting services, or the profession itself.

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4. Accounting Meaning
Accounting can be defined as a systematic
process of identifying, recording, measuring,
classifying, verifying, summarizing, interpreting
and communicating financial information. Let us
see more about the meaning and roles of
accounting in business.
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5. Historical Functions of Accounting 5
 Recording the financial transactions and maintain a journal to keep
them all.
 It is important to classify and separate the records and the ledger.
 Preparation of brief summary takes place for quick reviews.
 This type of accounting gives the net result other than just keeping
the records.
 The preparation of the balance sheet takes place to determine the
financial position of the business.
 The analyzed data and records are then used for other purposes.
 The last step is to communicate the obtained financial
information to the interested sectors, for instance, owners,
suppliers, government, researchers, etc.

6. Managerial Functions of
Accounting
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 Formation of plans in addition to controlling the financial
policies.
 Besides that, a budget is prepared to estimate the total
expenditure for future activities.
 Also, cost control is made possible by comparing the cost
with the efficiency of the work.
 The accounting also provides the necessary information
during the evaluation of employee’s performance.
 To check for fraud and errors is what the workability of
the whole procedure depends on.

7. Primary Characteristics of
Accounting
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•Relevance: Relevance in accounting is closely related to the
concept of useful information. It means that the information must be
capable of making a difference in taking various decisions by the
users. The information gathered by users relevant for one purpose
may not be necessarily relevant for other purposes. The relevant
information also reduces decision-makers uncertainty about future
acts.
•Reliability: Reliable information is required to form judgments
about the earning potential and financial position of a business firm.
Reliability differs from item to item. There are many factors affecting
the reliability of information such as uncertainties inherent in the
subject-matter and accounting measurements.

8. Secondary Characteristics of
Accounting-
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•Comparability: Comparability means that the users
should be able to compare the accounting information of
an enterprise of the period either with that of other
periods, known as an intra-firm comparison or with the
accounting information of the other enterprises, known as
an inter-firm comparison.
•Understandability: Understandability means that the
information provided through the financial
statements must be presented in a manner that the users
are able to understand it.

9. Objective of Accounting 9
To keep Systematic Records
The main objective of accounting is to keep a systematic
record of financial transactions which helps the users to
understand the day to day transactions in a systematic
manner so as to gain knowledge about overall business.
To Protect Business Properties
Accounting provides protection to business properties
from unjustified and unwarranted use. Information about
the above matters helps the proprietor in assuring that the
funds of the business are not necessarily kept idle or
underutilized.

10. Objective of Accounting 10
Ascertain Profit
Another objective of accounting is that it helps in
ascertaining the net profit earned or loss suffered on
account of carrying the business which is done by keeping
a proper record of all books of accounts with respect to
revenues and expenses of a particular period.
Ascertain the Financial Position
The accounting also helps the businessman to know
about his financial position. This objective is served by the
Balance Sheet or Position Statement. The Balance
Sheet is a statement of assets and liabilities of the
business on a particular date. It serves as a tool for
ascertaining the financial health of the business.

11. Objective of Accounting 11
Facilitate Decision Making
Accounting also helps in the collection, analysis, and
reporting of information at the required points of time to
the required levels of authority in order to facilitate rational
decision-making.
Information System
Another objective of accounting is that it can be defined as
accounting functions as an information system for
collecting and communicating economic information about
the business enterprise. This information helps the
management in taking appropriate decisions.

12. Limitations of Accounting 12
There are some misconceptions about accounting. Like
the fact that a Profit & Loss Statement shows the true
profit or loss earned in a year, or that a balance sheet
perfectly depicts the financial position of a firm.
Whereas the truth is that accounting is not a
perfect science or art or language yet. It has been
evolving for so many years and continues to evolve. The
limitations of accounting must be studied to understand it
better.

13. Limitations of Accounting 13
Measurability
One of the biggest limitations of accounting is that it cannot
measure things/events that do not have a monetary value. If a
certain factor, no matter how important, cannot be expressed in
money it finds no place in accounting. Some very important qualities
like management, loyalty, reputation, etc find no place on
the balance sheet or the income statement.
No Future Assessment
The financial statements show the financial position of the firm on
the date of preparation. The users of the statement are more
interested in the future of the company in the short term and long
term. However, accounting does not make any such estimates.

14. Limitations of Accounting 14
Historical Costs
Accounting often uses historical costs to measure the
values. This fails to take into consideration factors such as
inflation, price changes, etc. This skews the relevance of
such accounting records and information. This is one of the
major limitations of accounting.
Accounting Policies
There is no global standard in accounting policies. In India,
we follow the Accounting Standards. Americans follow the
GAAP and then there are the international standards,
namely the IFRS. And if a global company operates in more
than one country, there may be confusion.

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Limitations of Accounting
Estimates
Sometimes in accounting estimation may be required as it is not
possible to establish exact amounts. But these estimates will
depend on the personal judgment of the accountant. And estimates
are extremely subjective in nature. They are basically a person’s
guess of future events. In accounting, there are many cases where
such estimates need to be made like provision of doubtful debt,
methods of depreciation, etc.
Verifiability
An audit of the financial statements does not guarantee the
correctness of such statements. The auditor can only assure that
the statements are free from error to the best of his judgment.

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Limitations of Accounting
Errors and Frauds
Accounting is done by humans, so there will always be the
scope of human errors. There is also the fear of possible
manipulation of accounts to cover up a fraud. Since fraud
is deliberate, it is that much harder to spot. This is one of
the most dreaded limitations of accounting.

17. Advantages of Accounting 17
Maintenance of business records
Preparation of financial statements
Comparison of results
Decision making
Evidence in legal matters
Provides information to related parties
Helps in taxation matters
Valuation of business
Replacement of memory

18. Advantages of Accounting 18
Maintenance of business records
It records all the financial transaction pertaining to the respective year
systematically in the books of accounts. It is not possible for
management to remember each and every transaction for a long time
due to their size and complexities.
Preparation of financial statements
Financial statements like Trading and profit and loss account, Balance
Sheet can be prepared easily if there is a proper recording of
transactions. Proper recording of all the financial transactions is very
important for the preparation of financial statements of the entity.

19. Advantages of Accounting 19
Comparison of results
It facilitates the comparison of the financial results of one
year with another year easily. Also, the management can
analyze the systematic recording of all the financial
transactions according to the policies of the entity.
Decision making
Decision making becomes easier for management if there is
a proper recording of financial transactions. Accounting
information enables management to plan its future activities,
make budgets and coordination of various activities in
various departments.

20. Advantages of Accounting 20
Evidence in legal matters
The proper and systematic records of the financial transactions act as
evidence in the court of law.
Provides information to related parties
It makes the financial information of the organization available to
stakeholders like owners, creditors, employees, customers,
government etc. easily.
Helps in taxation matters
Various tax authorities like income tax, indirect taxes depends on the
accounts maintained by the management for settlement of taxation
matters.

21. Advantages of Accounting 21
Valuation of business
For proper valuation of an entity’s business accounting
information can be utilized. Thus, it helps in measuring the
value of the entity by using the accounting information in the
case of sale of the entity.
Replacement of memory
Proper recording of accounting transactions replaces the
need to remember transactions.

22. Disadvantages of Accounting 22
Expresses Accounting information in terms of
money
Accounting information is based on estimates
Accounting information may be biased
Recording of Fixed assets at the original cost
Manipulation of Accounts
Money as a measurement unit changes in value

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Disadvantages of Accounting
Expresses Accounting information in terms of money
Non-financial transactions cannot be given effect to in books
of accounts. Only transactions of financial nature are
measurable by the accountant. In fact, financial transactions
are expressed in terms of money.
Accounting information is based on estimates
There are some accounting data which are based on
estimates. Thus, inaccuracy in estimates is possible.

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Disadvantages of Accounting
Accounting information may be biased
Accountants personal influence affects the accounting information of
the entity. Different methods of inventory valuation, depreciation
methods, treatment of revenue and capital expenses etc can be
adopted by the accountant for measurement of income of the entity.
Hence, the income arrived in certain cases might be incorrect due to
the lack of objectivity.
Recording of Fixed assets at the original cost
There can be a difference between the original cost and current
replacement cost of a fixed asset due to efflux of time, change in
technology etc. Thus, the balance sheet may not show the true
financial status of an entity.

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Disadvantages of Accounting
Manipulation of Accounts
The accountant or management can manipulate or
misrepresent the profits of an entity.
Money as a measurement unit changes in value
Stability in the value of money is not possible. Accounting
information will not show the true financial position if
changes in the price level are not considered.

26. Internal Users 26
Managerial accounting identifies, measures, analyzes and
communicates the financial information needed by
management to plan, control, and evaluates a company’s
operations for the internal users.
Accounting’s goal is to provide necessary information
for the management or also can be defined as Internal
users.

27. Internal Users 27
Internal users are that individual who runs, manages and
operates the daily activities of the inside area of an
organization.
1. Owners and Stockholders.
2. Directors,
3. Managers,
4. Officers.
5. Internal Departments.
6. Employees
7. Internal Auditor.

28. External Users 28
External users are those individuals who take interest in the
account information of an organization but they are not part
of the organization’s administrative process.
External users have a direct or indirect interest in
accounting information.
Financial accounting is the process for the preparation of
financial reports of the enterprise for use by both
internal and external parties.
These reports are important to the external users of
accounting information.

29. External Users 29
1. Creditors.
2. Investors.
3. Government.
4. Trading partners.
5. Regulatory agencies.
6. International standardization agencies.
7. Journalists.

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Users of Accounting Information

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External Users
Creditors
Creditors or lenders use the accounting information to find
out the ability of the borrower to repay the loan, the number
of assets and liabilities of the borrower, evidence of income,
economic position, etc. before he or she lend the money to
the economic entity.
Investors
Investors are the capital providers of a business.
Before investing, an investor sees the financial report for
figuring out the possibilities of the business in the future.
Financial information is important for an investor for making
sure that the investment is secure.

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External Users
Trading partners
Business needs business to do business, it is the
truth.
Associate trading companies look at the financial
information and decide to trade with the particular
economic entity.
Government Regulatory Agencies
The financial information is vital for government
regulatory agencies as it allows them to monitor the
economy and market.

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External Users
Lawmakers and economic planners
It is important to keep a nation’s economic structure up-to-
date with global changes. It is a job for lawmakers and
economic planners.
The accounting information provides information that is
necessary for making changes to the existing laws at the
right moment for the economy and society betterment.

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External Users
Other examples
There are other external users for example; labor unions,
customers and consumers, suppliers, SEC, tax authority,
chamber of commerce, press, competitors, auditors, etc.
Anybody outside of the managing radius of an economic
entity is interested in the financial information of it, is defined
as an external user.
For example to that statement; an MBA student looking for
financial information on Google, he/she is the external user
of the accounting information of Google.

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