Accounting Definition

American Institute of Certified Public Accountants

(AICPA)

Defines accounting as an art of recording,
classifying, and summarising in a significant manner, and
in terms of money and events which are, in part at least,
of a financial character and interpreting the results thereof

Accounting Principles
Accounting Concepts
Accounting Conventions
ACCOUNTING CONCEPTS

In order to make the accounting language convey
the same meaning to all people & to make it more
meaningful, most of the accountants have agreed
on a number of concepts which are usually
followed for preparing the financial statements.
These concepts provide a foundation for
accounting process. No enterprise can prepare its
financial statements without considering these
concepts.
1) BUSINESS ENTITY CONCEPT
Business is treated as separate & distinct
from its members
Separate set of books are prepared.
Proprietor is treated as creditor of the
business.



2) MONEY MEASUREMENT CONCEPT
Transactions of monetary nature are
recorded.
Transactions of qualitative nature, even
though of great importance to business
are not considered.
3) GOING CONCERN CONCEPT
Business will continue for a long period.
As per this concept, fixed assets are
recorded at their original cost &
depreciation is charged on these assets.
Because of this concept, outside parties
enter into long term contracts with the
enterprise.
4) ACCOUNTING PERIOD CONCEPT
Entire life of the firm is divided into
time intervals for ascertaining the
profits/losses are known as accounting
periods.
Accounting period is of two types-
financial year(1
st
Apr to 31
st
March) &
calendar year(1
st
Jan to 31
st
Dec).

5) HISTORICAL COST CONCEPT
Assets are recorded at their original price.
This cost serves the basis for further
accounting treatment of the asset.
Acquisition cost relates to the past i.e. it is
known as historical cost.
6) DUAL ASPECT CONCEPT
Every transaction recorded in books
affects at least two accounts.
If one is debited then the other one is
credited with same amount.
This system of recording is known as
DOUBLE ENTRY SYSTEM.
ASSETS = LIABILITIES + CAPITAL
7) PERIODIC MATCHING OF COSTS AND
REVENUE CONCEPT
Income made by the business during a
period can be measured only when the
revenue earned during a period is
compared with the expenditure incurred
for earning that revenue.

REALISATON CONCEPT
According to this concept revenue is
recognised when a sale is made. Sale is
considered to be made at the point when
the property in goods passes to the buyer
and he becomes legally liable to pay
ACCOUNTING CONVENTIONS
An accounting convention may be defined
as a custom or generally accepted practice
which is adopted either by general
agreement or common consent among
accountants.
1) CONVENTION OF FULL DICLOSURE
Information relating to the economic
affairs of the enterprise should be
completely disclosed which are of material
interest to the users.
Proforma & contents of balance sheet &
P&L a/c are prescribed by Companies Act.
It does not mean that leaking out the
secrets of the business.
2) CONVENTION OF CONSISTENCY
Accounting method should remain
consistent year by year.
This facilitates comparison in both
directions i.e. intra firm & inter firm.
This does not mean that a firm cannot
change the accounting methods according
to the changed circumstances of the
business.
3) CONVENTION OF CONSERVATISM
All anticipated losses should be recorded
but all anticipated gains should be
ignored.
It is a policy of playing safe.
Provisions is made for all losses even
though the amount cannot be determined
with certainity
4) CONVENTION OF MATERIALITY
According to American Accounting
Association, An item should be regarded as
material if there is reason to believe that
knowledge of it would influence decision of
informed investor.
It is an exception to the convention of full
disclosure.
Items having an insignificant effect to the user
need not to be disclosed.
Definition of Management Accounting


According to the Chartered Institute of Management
Accountants (CIMA),
Management Accounting is "the process of identification,
measurement, accumulation, analysis, preparation, interpretation
and communication of information used by management to plan,
evaluate and control within an entity and to assure appropriate use
of and accountability for its resources. Management accounting also
comprises the preparation of financial reports for non-management
groups such as shareholders, creditors, regulatory agencies and tax
authorities"
Financial Accounting V/s
Management Accounting
Financial Accounting


the financial accounting , the
origin of preservation of
knowledge gives emphasis on
recording keeping on a whole
firm basis for the purpose of
decisions by all the users of
accounting information, both
external and internal
Management Accounting


Management accounting
uses cost data for
provision of information
for strategic management
decisions. It is mainly
concerned with the
provision of help to the
managers to asses them
in the process of decision
making and design
business strategies.



Importance
Financial Accounting Management Accounting
Department: Preparing financial
accounting is the work of
finance department.
Managerial accounting is not
specific task of particular
department. co-ordination of
all department creates
management accounting.
Mandatory Vs.
optional:
Preparing financial
accounting reports are
mandatory especially for
limited companies.
There are no legal
requirements to prepare
reports on management
accounting.
Financial Accounting Management Accounting
Financial accounting is strictly
required to follow GAAP.
GAAP is not mandatory for
Management Accounting.
Time span: Financial accounting
statements are required to be
produced for the period of 12
months.
No specific time span is fixed for
producing financial statements.
Monetary
Vs. non-
Monetary:
Most financial accounting
information is of a monetary
nature.
Management accounting
information may be monetary or
alternatively non monetary.
Relevance
Vs.
precision:
Financial accounting
emphasizes on precision.
Management Accounting
emphasizes on relevance.
Format: Financial accounts are
supposed to be in
accordance with a specific
format by IAS so that
financial accounts of different
organizations can be easily
compared.
No specific format is designed
for management accounting
systems.
GAAP:
Planning and
control:






Financial accounting helps in
making investment decision,
in credit rating.
Management Accounting helps
management to record, plan
and control activities to aid
decision-making process.
Financial Accounting Management Accounting
External Vs.
Internal:
A financial accounting system
produces information that is
used by parties external to
the organization, such as
shareholders, bank and
creditors.
A management accounting
system produces information
that is used within an
organization, by managers and
employees.
Financial Accounting Management Accounting
Users: Financial accounting reports are
primarily used by external users,
such as shareholders, bank and
creditors.
Management accounting
reports are exclusively used
by internal users viz.
managers and employees.
Objectives: The main objectives of financial
accountng are :i)to disclose the end
results of the business, and ii)to
depect the financial condition of the
business on a particular date.
The main objectives of
Management Accounting are
to help management by
providing information that
used by management to
plan, evaluate, and control.
Accounting
process:
Follows a full process of recording,
classifying, and summmarising for
the purpose of analysis and
interpretation of the finnancial
information.
Cost accounts are not
preserved under
Management Accounting but
analyses necessary data
from financial statements
and cost ledgers.