Accountancy or accounting is the art of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management.
Accounting is thousands of years old. The earliest accounting records were found in the Middle East which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced.
Early accounts served mainly to assist the memory of the businessperson and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information. This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.
Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, owner-managers and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accounting and provides information to present and potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP.
Accounting has also been defined by the AICPA 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."
Etymology
The word "Accountant" is derived from the French word "Compter", which took its origin from the Latin word "Computare". The word was formerly written in English as "Accomptant", but in process of time the word, which was always pronounced by dropping the "p", became gradually changed both in pronunciation and in orthography to its present form."
History
The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned.
Luca Pacioli and double-entry bookkeeping
(Father of Double Accounting System was Luca Pacioli)
A double-entry bookkeeping system is defined as any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form. The oldest discovered record of a complete double-entry system is the Messari (trans. treasurer's) accounts of the city of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and contains balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.
Although Luca Pacioli did not invent double-entry bookkeeping, which was developed by merchants in northern Italy sometime during the late 13th or early 14th centuries, his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today.[22] Even though Pacioli's treatise exhibits almost no originality, it is generally considered as an important work, mainly because of its wide circulation, it was written in vernacular Italian, and it was a printed book.
Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (trans. "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (trans. "Details of Accounting and Recording"). It was written primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebra.
According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books of account are at the direct basis of this system: the memoriale ( trans. memorandum), the giornale (journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index.
The nature of double-entry can be grasped by recognizing that this system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription and calculation. One of its social effects was to proclaim the honesty of merchants as a group; one of its epistemological effects was to make its formal precision based on a rule bound system of arithmetic seem to guarantee the accuracy of the details it recorded. Even though the information recorded in the books of account was not necessarily accurate, the combination of the double entry system's precision and the normalizing effect that precision tended to create the impression that books of account were not only precise, but accurate as well. Instead of gaining prestige from numbers, double entry bookkeeping helped confer cultural authority on numbers.
MEANING OF ACCOUNTING
The art of recording , classifying and summarizing , in a significant manner and in terms of money , transaction and events which are, in part at least, of financial character, and interpreting the result thereof."
The three important aspects of accounts have been highlighted by the above definition.
1. Account as an Art & science.
2. Accounting is done for Business transaction.
3. Accounting is a system.
OBJECTIVES OF ACCOUNTING
•Record business activities in a systematic manner.
•Evaluate the performance of the business in terms of profit.
•Know the financial position of the business.
•Control business activities effectively.
•Provide information to various stake holders in the business.
BASIC TERMS IN ACCOUNTING
•Entity: Entity has a definite individual existence. Business Entity is an identifiable business enterprise such as Super Bazaar, etc.
•Transaction: Transaction is an event involving some value between two or more entities
•Assets: Assets are economic resources of an enterprise that can be expressed in monetary terms.
"Fixed Assets" are assets held on a long term basis such as land, buildings, etc.
"Current Assets" are assets held on a short term basis such as debtors, bills receivables, etc.
•Profit: Profit is the excess of the revenues of a period over its related expenses during an accounting year. Profit increases the investment of the owners.
•Gain: Gain is a profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.
•Loss: The excess of expenses of a period over its related revenues is termed as Loss.
•Discount: Discount is the deduction in the price of goods on sale.
•Voucher: The documentary evidence in support of a transaction is known as Voucher.
•Goods: Goods refer to the products which a business unit produces and sells, or by and sells.
•Drawings: Withdrawal of money and/ or goods by the owner from the business for personal use is known as drawings. Drawings reduce the investment of owners.
•Purchases: Purchases are a total amount of goods procured by business on credit and cash, for use or sale.
•Stock: Stock (inventory) is a measure of something on hand - goods, spares and other items in a business. It is called 'Stock in hand.'
•Debtors: Debtor's persons and / or other entities who owe enterprise money, having bought goods and services on credit.
•Creditors: Creditors are persons and / or other entities who have to be paid by an enterprise for providing goods and services on credit.
ACCOUNTING ASSUMPTIONS
•Money measurement concept: Every accounting transaction is major in terms of money.
•Dual entity concept: As per this concept an accountant assume that business & businessman are two different entities.
•Going-concern concept: According to this assumption while doing the accounting it is assumed that business will continue for fairly longer period of time.
•Cost concept: This concept is applicable only for fixed assets accounting purpose it states that while computing the cost of fixed assets all the incidental expenditure for the acquisition of the assets should be added in cost fixed assets.
•Dual-aspect concept: This is the fundamental accounting assumption which state that every transaction has too folds effect positive or negative in accounts it is dr. & cr.
•Periodicity concept: Every accounting is divided in smaller periods as per this concept.
•Cost attach concept: While computing the revenue earned by the organization all the incidental expenditures required to earn such a revenue should be accounted for as per this concept .
•Accrual concept: As per this concept revenue or expenditure should be accounted for only on the basis of the certainty of that revenue receives or expenditure paid actual payment or receipts is irrelevant.
•Legal aspect concept: When there is a conflict between laws & accounting account should follow law procedures first.
MEANING OF ACCOUNTING OR LEDGER
A ledger is the summery of all the transactions relating to any person, thing, an assets or liability.
References: Indiataxes.com,wekipedia.com,M.Com text books, B.Com text Books
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