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IIBF AFB PRINCIPLES OF BOOKKEEPING & ACCOUNTANCY

IIBF AFB PRINCIPLES OF BOOKKEEPING & ACCOUNTANCY

Accounting is the language of the business. The basic function is to communicate these also of the business operations and tell about the financial health of the business. 

So, in this context, accounting reports the results of an organization. 

The aptest definition is given by the ‘American Institute of Certified Public Accountants, which is as under:

Accounting has been defined as the art of recording, classifying, and summarizing the transactions and events which are recorded in financial figures as well as the interpretation of the results. 

More or less, people take accountancy and the bookkeeping one and the same thing which is wrong. Accountancy is a wider concept while bookkeeping is a part of accountancy and thus, a narrow topic that falls under the purview of accountancy. 

Bookkeeping refers to the recording of business transactions as original entries and then posting those entries to the ledgers. 

Accounting refers to the compilation of accounts in a way through which one can know the business affairs. 

Normally when one talks about financial statements they mean balance sheet, statement of profit and loss, and the statement of changes in the financial position i.e fund flow statement or cash flow statement as per the regulatory obligations, along with the explanation of any three statements and notes for schedules, etc. 

PURPOSE OF FINANCIAL STATEMENTS: The main aim of financial statements is true give information about the business’s financial performance, financial position, and any changes that come in the financial position. 

USERS: These financial statements are used by different uses such as government authorities i.e income tax & GST authorities, investors, shareholders, directors, banks and Financial Institutions, bank’s creditors as well as the Business Associates. 

Accounting as a business language communicates the financial results and performance of the business through its financial statements for intended users. So, it is very much important that the financial statements represent the true and fair state of affairs of the business. 

Accounting Standards: Like any other language, accounting also has a different set of rules and criteria, which are referred to as Accounting Standards. 

MEANING OF BOOKKEEPING 

It is the process of maintaining a proper systematic packet of books by the business through the original records.  Bookkeeping records all the transactions in terms of money after verifying only original records. 

In the process of bookkeeping the following activities are performed: 

  • Identification of transactions having financial nature from the other non-financial transactions. 
  • Measurement of the transactions in terms of money. 
  • Recording the transactions in the primary book of entry of business 
  • Classifying the transactions. 

Bookkeeping has nothing to do with interpreting accounting and therefore it is different from it. 

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ACCOUNTING

Accounting is a broad concept and has the largest scope. It begins where the bookkeeping ends. In the long process of accounting, the transactions that have been recorded in the bookkeeping are summarised, interpreted, and then communicated as final results to the interested parties or the users of financial accounts. 

Accounting can further be classified into: 

  • Financial accounting 
  • Cost accounting 
  • Management Accounting 

 

The Accounting serves to fulfill the following basic objectives: 

  • Maintenance of records of business in a systematic way 
  • Calculation of profits or losses to find the operating results of the business 
  • To find out the financial position of the business 
  • To make valuable definition formation to the management and other users of financial statements in an understandable way 
  • To fulfill the requirements under the Companies Act, 2013 & Income Tax Act 

KINDS OF ACCOUNTING 

Stewardship Accounting: In this type of accounting, the accounting system is associated with the accounting done by stewards (the people who were employed by wealthy persons in earlier times). This type of accounting was needed to keep a record of the transactions of business and to manage the property and debts etc. 

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Financial Accounting: This system of accounting concerns the financial States of business affairs. The financial accounting system also the financial operations by working out in the profits and losses as well as in net worth of the business. 

It is done more on account of the owners, creditors, regulatory authorities as well as authorities, etc. 

This accounting is done on a post-facto basis and should be accurate because the results of the financials also get audited under the company law. 

Cost Accounting: In this system of accounting, accounting involves estimating the costs in advance. This estimation helps in doing the analysis of the expenditure so as to find the probable cost of the product which is produced by the organization so as to fix their prices and to exercise proper control over the cost that will be incurred in the production of these products. 

Management Accounting: The process to identify, measure, classify, analyze, prepare, interpret and communicate the information with the intention to assist in the business management to make decisions for the fulfillment of business objectives. 

Management accounting is basically done by the business managers who need meaningful information to make decisions and provide different perspectives which helps in providing or estimating the future requirements. 

Social Responsibility Accounting: Under social responsibility accounting, the social effects of the business decisions are taken into account along with the consequences that are economic in nature.

Human Resources Accounting: It refers to the process in which data about human resources is identified and measured and communicated to the interested parties. In simple words, HRA involves investment in people and identifying the replacement cost of people. 

ORIGIN OF ACCOUNTING PRINCIPLES

It has been seen that the Greeks, Egyptians, Romans, and Babylonians had a well-developed and well-maintained system of Record-Keeping in place. 

In the present time, bookkeeping is seen to have originated from the practices that have been employed by the Italian merchants during the 15th century. Those practices were later on referred to as the ‘double-entry bookkeeping system. 

Accountancy in India started during the Regime of King Chandragupta. A book on accountancy which has been named ‘Arthashastra’ has been bitten by one of his ministers, Kautilya. 

INDIAN ACCOUNTING STANDARDS

Under the authority of the Council of Institute of Chartered Accountants of India (ICAI), accounting standards are issued. 

A Board named, Accounting Standards Board, was constituted by the ICAI in 1977 in the month of April. It has been set up in order to harmonize the different accounting practices and policies that are prevalent in India. 

While the main function of ASB is to formulate accounting standards as well as provide broad areas in which these accounting standards are required to be formed. 

While doing all the formulation of accounting standards, due consideration is given to the international accounting standards that are issued by the International Accounting Standards Committee, and efforts are made to integrate them into the Indian laws, customs and blind them into the business environment that prevails in India. 

ASB also issues several guidelines on the issued accounting standards to give clarifications on issues that arise from time to time due to their implementation. 

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On July 1, 2003, ICAI had issued the Compendium of Accounting Standards which covered 28 Accounting Standards, their interpretations, and general clarifications related to them. 

ICAI expects that Indian accountants prepare financial statements with prudence and after taking into account the guidelines and suggestions that have been issued by the Accounting Standards Board. 

There are some accounting standards that are recommendatory in nature while others are compulsory. And when a mandatory accounting standard is not being followed by the accountants in the preparation of financial statements, the auditors who are basically the members of ICAI, qualify their audit report.

There are many other requirements that can lead to an order to qualify his or her audit report when you have not met it. These other requirements could be by SEBI and Companies Act. 

According to section 211 of the Companies Act, if a financial statement is not in consistency with the accounting standards, the company is required to disclose this inconsistency and provide the reason for it as well as provide any financial effect that has occurred due to such inconsistency.

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So, this is all about accountancy and the accountancy practices that are prevalent in India. Efforts are being made to make it as transparent as possible and bring the accounting system in the line with international standards and make a system that provides sound structure to provide a fair system.

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