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Every business has profit motive. It has transactions of financial nature, such as, purchasing goods, selling goods, incurring expenses, receiving income etc. These transactions are financial in nature and affect the profit of the business. Accounting transactions are both money transactions and money worth transactions. Credit transactions are known as money worth transactions. It means that accounting transactions may not be necessarily cash transactions.

Transactions are classified as assets, liabilities, capital, revenues and expenses. Income statements are prepared to ascertain profit or loss of the business. The position statement is prepared to assess the value of assets and liabilities of the business. Various statements are prepared and ratios are calculated to measure the actual perfom1ance of the business. Comparison of the actual performance is compared with previous performance or desired performance and effective plans for future is made. In this way, accountancy is an art of identifying, classifying, recording, summarizing and interpreting business transactions of financial nature. 

The process of maintaining accountancy records contains the following steps:

All financial transactions which have documentary evidence are identified as accounting transactions .The elements of the transactions are classified as assets, liabilities, capital, revenues and expenses. These transactions are recorded in the appropriate books of accounts. Income statements are prepared to   ascertain profit or loss of the business during accounting period. Position statements are prepared to ascertain assets and liabilities of the business. Finally, result of the business transactions are communicated.

  • Definition of Accountancy

In the words of Smith and Ashbume, “Accountancy is a means of measuring and reporting the results of economic activities.”

In the opinion of Bierman and Derbin, “Accountancy may be defined as the identifying, measuring, recording and communicating of financial information.”

Book-keeping, Accounting and Accountancy

Book-keeping is the proper and systematic maintenance of the books of Accounts. It includes identifying accounting transactions. Initial record, preparation of Ledger Accounts and Trial Balance. Accounting is Book-keeping plus summarizing and interpreting business transactions of financial nature. Accounting at present is accepted as information system and decision making activity. Accountancy is the systematic knowledge of Accounting. It refers to the conceptual knowledge of the subject and its proper application and communication to interested parties. Accountancy as such is Book-keeping plus Accounting plus summarizing, interpreting and communicating Accounting information.

CHARACTERISTICS OF ACCOUNTANCY

There are four essential characteristics of accountancy:

                                                                                                                                                                                                                                                                                                                                                                                                                

 

 

 

 

 

1. Economic events. An economic event is known as a happening of consequence to a business organization. It is related to business which has a definite consequence. For example, purchase of a machine in cash has a consequence of increased asset and decreased· cash.

Economic events may be classified as external and internal event. An external event involves exchange of goods and services between two entities, e.g., sales of woodland shoes to the customers. Internal event occurs within the organization like supply of raw material from stores department to manufacturing departments.

2. Identification, measurement, recording and communication. Identification involves the  analysis of an event as regards its materiality which is reflected in accounting books. The event should be observed for consideration as economic activity and its relevance as accounting transactions.

Measurement involves quantification of business transactions in monetary terms. Anything which cannot have monetary measurement is irrelevant for accounting purposes although, it may have other decision making implications. For example, resignation of a manager does not have monetary impact but it may affect the decision making on future managerial appointment. Money acts as a common measurement unit for accounting.

Recording involves systematic presentation of a transaction to ret1ect the amount involved and other pertinent details of the transactions. Communication of economic events in a systematic manner aids in managerial decision making. Accounting reports in the form of financial statements is important indicator of business health. Various other daily, monthly and quarterly reports are prepared for the analysis of users. Analysis of reports in terms of ratios, percentages, etc. should be done to arrive at effective decision.

3. Organization. The entity performing business activity can be organized by choosing   appropriate form of organization. It can either be sole proprietorship, partnership, company, cooperative society or boards such as Cantonment board, Municipal board, Cricket board etc.

4. Interested users of information. The users can be divided into two categories viz., internal users and external users.

Internal users comprise of top, middle and lower managerial personnel. They need accounting information for their decision making purposes. Top level is concerned with strategic planning. Middle level with operational planning and lower level with executing and controlling operations. Information is provided as regards sales, cash, and expenses for future decision-making.

External users can be categorized into two categories viz. external users having direct financial interest and external users having indirect financial interest. The former comprises of investors, creditors, banks, debenture holders etc. while the latter comprises of Income tax, Sales tax, Excise departments, etc.

As such Accountancy refers to the conceptual knowledge of the subject and its application also. It also tells us why and how to summarize accounting information and communicate it to concerned parties.