বুধবার, ২৮ অক্টোবর, ২০১৫

Philosophy of Debit and Credit of Accounting

Since a transaction is an exchange of values, it is composed of two elements, both of which must be recorded in order to make a complete financial record. In any transaction the presence of the dual amounts is evident in the fact that on one hand a commodity, right, or service is received and on the other hand a commodity, right, or service is given up. Every transaction involves only the three balance sheet elements, assets, liabilities, and proprietorship, causing increase and decrease in three elements.

The effects of transactions on the financial records, therefore, consist only of assets changes, liability changes, and proprietorship changes or combinations thereof. Any changes in the income and expense are basically proprietorship changes whose ultimate effects are reflected in to balance sheet.

Factors for growth of modern accounting

Furthermore, with the growth of industries, trade and commerce, with ever-increasing complexities of business management and with ever-mounting competition in business fields, the necessity of proper book-keeping and accountancy is felt by the business houses. The growth of commerce and industry has brought about the use of more adequate modern accounting records and an increasing interest in such records. Some of the features of present-day business which create a need for modern accounting methods are as follows:

1. Size: Business units have grown to tremendous proportions. Operations are too expensive to be comprehended by an individual without summarized reports. Information for management must be obtained from accounting reports since personal inspection of all operations is physically impossible and verbal reports are inadequate. Objectivity of management enables policies to be formulated without personal bias, but it cannot be maintained in a large business without comprehensive reports.

2. Complexity of business organization: Operations of an enterprise are becoming more complex under modern economic condition, necessitating more nearly complete control through accounting.

3. Separation of management from ownership: The joint stock form of business organization has tended to bring into existence managers, who are not owners, and owners, but share-holders control the management, and in order to do this effectively these owners must have records and reports which clearly indicate what the management has been doing.

4. Competition: In case of keen competition, profit margins tend to become narrower. Under such conditions the information to be obtained from accurate accounting records can be especially helpful to the business management in its endeavor to reduce cost and avoid selling at a price that is economically unsound. At a time when profit margins are narrow, haphazard guessing and wrong forecasting may be disastrous.

5. Variety of properties: Besides the increase in the size of the business unit, there has come to be a general diversity in the properties owned by a business. This variety of properties may be due to the increase in the number of items produced by one company, and also to the largeness of territory which may be served by a single enterprise. Investment and maintenance policies relating to property often constitute a major problem in a large concern. Depreciation policy presents an involved problem for a business owning a variety of properties, especially if these properties have various lengths of useful life.

6. Variety of investor: One of the important phenomena of modern business is the fact that the investment in an individual enterprise, especially the corporation, may be provided for by a large number of persons. Many investors, having varying contractual relationships with the company, make accurate records necessary to disclose the status of each.

7. Taxes and government control: Income tax laws require the exact computation of income. Companies Act also requires periodic reports and returns to various governmental agencies. The necessity for compliance with these laws has caused businessmen to see the additional need for adequate records.

8. Uniform records: The old tendency to use accounting methods planned for the convenience of the individual firm has given way to a trend towards uniformity in accounting systems. Statistics are valuable to the businessman in the formation of policies. Accounts, when they are comparable, are an important source of statistical data.

Business cycles and their allied repercussions constitute an important aspect of the modern economic order. Studies of their causes and effects are aided by the information obtainable from uniformly kept accounts. The business cycle increases accounting problems relating to fluctuating prices and revaluation of assets.

Trade associations in some cases foster the use of uniform records and employ the information obtainable from the comparable accounts for the benefit of individual members and the industry as a whole.

Credit studies are simplified when the financial reports on which they are based, whether for obtaining credit at a bank, or from another concern, or in the open market, have been prepared in such a way as to be comparable with other similar reports.

Rate marking is a difficult task. Its dependence upon uniform accounting system is illustrated by the fact that the public utilities are required to use uniform systems established by the rate making governmental agencies.

What are Frameworks of Accounting?

The distinguishing feature of management accounting of accounting for planning and control is its emphasis on the first and second purposes.

Accounting and Planning – Accounting is the handmaiden of planning. Without it planning cannot be effective, since values must be established throughout before decisions as to courses of action are taken. Management is concerned with decisions about the future while accounting accumulates past data about operations of the business. But in most cases the past experience provides a guide to future actions. Accounting records what decision has been taken in the past and with what results, and it sets down acceptable criteria for evaluating such results and helps management in deciding the future course of action on the basis of past experience.

The emphasis has shifted from purely historical accounting to the submission of purposeful up-to-date information as a means of controlling current operations, and predictions of the future as a guide to planning. Budgeting and planning in general is taken as highly significant management functions.

The accountant helps to bring together the budget estimates and co-ordinates them into a comprehensive plan for future. When we have accounting as a tool for planning we may have two types of planning: Period planning and Project planning. Period planning involves preparation of budgets or estimates as a means of projection of the future activity of the enterprise in terms of expenses, revenues, assets, liabilities for a stipulated period.

While Project planning is the analysis that is made in order to reach a decision on a specific project or proposal and involves a consideration of how future expenses and revenues will be affected over the whole life of the project. In the field of both the Period and Project planning accounting has an important role to play.

Accounting and Control – Control function of the management involves the determination of the degree to which the actual operation of business conforms to its plans and policies Accounting helps management in the control process in the following ways:

(a) As a means of communication of enterprise’s objectives, goals, plans, policies and targets through various types of accounting reports.

(b) As a means of motivation through the devices of budgetary control and standard costing which motivates the employees of an organization to work on certain mission; and

(c) As a means of checking up the performances of the employees as well as of various departments or sections. Thus accounting helps the appraisal process by which the management evaluates how well the employees are doing their job.

During the course of operation, measurements can be made and related to the budget plan to see if operations are being carried out as intended. From the managerial point of view, the accounting process helps to ascertain the effectiveness of the management and provides the management with a means for self-evaluation. Accounting not only directly contributes towards only these two process of management, i.e., planning and control but it also helps in other management process, viz., co-ordination, direction, motivation, organization, etc.

মঙ্গলবার, ২৭ অক্টোবর, ২০১৫

The definition of bookkeeping and accounting

Book-Keeping:
A systematic record of the business transaction i.e., dealing in regard to money or money's worth, in books of account in called Book-Keeping. It may also be defined as the art and science of recording mercantile transaction in a regular and systematic manner; the art of keeping accounts in such a manner that a man may know the true of the business and property by an inspection of book of account.

Definition Book-keeping and Accountancy:
Let us now see the differences of the two terms to have a clear conception of them. In the nineteenth century no different probably existed between these two terms, and they were used in the same sense.

সোমবার, ২৬ অক্টোবর, ২০১৫

What do you mean by evaluation of accounting?



Accounting in the hand sense of the term, includes all the business records kept by a business organization or unit of government, as well as the principles and technique involved in the establishing and maintaining the records. It covers two general groups: first, statistics and memorandum relating to production, properties and other non-monetary quantities; and second, financial records representing investment, expenditure, receipts, fiscal changes and standing, expressed in monetary units. In the narrower sense as ordinarily used and as treated in this article, it relates to the second class of records.   

The other records however are of great business and public importance; they are usually integrated with the more formal system of accounting dealing with financial categories. A modern railroad company, for instance, maintains in addition to records of monetary transaction records of service, physical operations, employees, materials, locations and changes of properly.

The history of accounting reveals very clearly the constant interdependence of accounting knowledge and business requirements. Progress in the science and technique of accounting has made possible and increase in the size, complexity and territorial scope of business operations. Conversely, these business changes have spurred the advance in accounting knowledge and technique. The kind of records that are needed depends upon the business, but the kind of business that is possible depends upon the records that can be kept.

Accounting goes back to the earliest time of doing business. The simplest of commercial transactions, repeated period after period, required some sort of record. The invention of the system of double-entry, which is fundamental to complete financial statements, cannot be definitely credited to any particular person. There is evidence that it was employed even during Phoenician, Greek and Roman commercial supremacy and it was extensively developed and applied during the great Italian commercial era of the fourteenth and fifteenth centuries. After commercial leadership passed to Holland and England, it was introduced and greatly developed in the accounting houses of the great trading companies. 

The system depended upon “hand” efforts, and became formalized as to procedure and related books. There was the “day book” which recorded all the business transactions in chronological order. From the day book items were restated chronologically in the “Journal”, and analyzed into “debts” and “credits” by accounts. Finally, from the journal the items were entered in the “ledger” to individual accounts. Cross checks and balances were established to maintain accuracy of records. This mechanical system continued until the expansion of business that followed in the wake of the industrial revolution.

   

    

What are the brance of accounting?

There are extensive description of Branches of Accounting are as follows:

General Accounting – It provides a record of business transactions in financial terms and also the periodical preparation of financial statements from these records. It furnishes accounting information for the owners, for management, for Government, for creditors and for other interested groups in any organization. The General Accounting includes; Book-Keeping (the actual recording process) and also report preparation including interpretation. General Accounting can also be called Financial Accounting. With the growth of trade, commerce and industry in the last few centuries, the need for specialized accounting activities was felt much. The specialized fields like Auditing, Costing, Tax Accounting, Mechanized Accounting, etc., are the offshoots of modern development in the field of Accountancy. Of various specialized fields of accounting, the following can be mentioned:-  

Auditing – It involves the verification of the records and the reports prepared by the accountants of an enterprise, in order to check errors and frauds and to authenticate the financial statements. It represents a field of accounting activity that reviews independently the ‘general’ accounting. Auditing is usually done by an independent accountant who examines records and reports and issues a statement of opinion regarding their accuracy together with a report containing confidential advice to the management. Auditing is a great safeguard of absentee capitalism.  

Cost Accounting – Costing accounting emphasizes the determination of business costs, especially unit costs of production and distribution. It stresses costs of products and processes rather than the proprietorship of the enterprise as a whole. Financial accounting or General accounting provides information with which management can exercise financial control over assets but it lacks in furnishing the operating management with data pointing to control of operations. Since a major efforts in all accounting is the determination of costs, all accounting is cost accounting, in the true sense of the terms. What has come to be known as cost accounting is heavily oriented to the determination of factory costs, hence factory inventories and unit costs of products. In the beginning the impetus was provided for by a desire to obtain more accurate inventory valuations. Costing enables a business to find out not only what various jobs or process have cost but also what cost they should have; it indicates where losses and wastes are accruing before the work is finished; therefore immediate action may be taken, if possible, to avoid such losses or wastes. Costing helps to a great extent in formulation of Business Policy regarding the alternative methods and procedures of production. And efficient system of costing is an important factor for industrial control. The introduction of Standard Costing and Budgetary Control method as tools of costing has further widened the horizon of uses of costing.

Budgetary Accounting – It refers to a systematic forecasting of business operations in financial terms. It presents in an account form the transactions planned for the coming period and summarizes these transactions in accounting statements. It deals with contemplated rather than actual transactions.

Management Accounting or Managerial Accounting – It is based upon the concept of accounting as a method of management or as a tool by which managerial effectiveness is enhanced. Although it deals primarily with the same financial data, it is not confined to financial data alone. It seeks to assure scientific managerial planning and sound managerial decisions by furnishing historical data and projections of the consequences of alternative decisions. It seeks to make managerial control more effective by encouraging planning and keeping the plan constantly before management’s attention, comparing performance with the results anticipated. It provides built in checks and balances and continuous review and appraisal to prevent error and fraud and to enable management to correct mistakes and improve methods. While financial accounting is chained to history, administrative accounting is free 6to conjecture. In fact, the utility of administrative accounting depends in large measure upon the discernment with which the accountants predict the future, whereas the utility of financial accounting depends upon the justice of the accountant’s representation of the results of past actions.

Tax Accounting – It refers to the determination of the correct liability for taxes, especially income taxes and social security-taxes and preparation of necessary returns. Tax accounting is almost a separate field of knowledge in itself. Income tax accounting cuts across both accounting and law. It is probably 80 per cent accounting, since the data for tax returns are secured from accounting records and since accounting knowledge is required in the preparation of these data for presentation on the tax returns. That it is 20 per cent law results from the fact that statutory provisions must be met and court decisions must be contemplated in the preparation of return and in their negotiation with agents of the Internal Revenue Services. After a tax case has reached the courts, the percentages are perhaps reversed.

Industrial Accounting – It refers to the integration of Financial Accounting and Cost Accounting for managerial planning and control of an industry. Actually in the area of Industrial accounting we find the integrated roles of ‘general’ accounting, ‘cost’ accounting and ‘management’ accounting. Industrial accounting is used to describe the modern conception of accounts as a tool of management. It helps the management in (a) measuring the operating results; (b) controlling business expenditures so as to maximize profits; and (c) formulating business policies. In practical experience, the business policy is determined by a compound of facts, customs and the social philosophy of the management. If as ought to be the case, facts dominate in the determination of business policy, the Industrial accounting by presenting the facts as to the financial condition and the operating results importantly influences the business decisions. Its importance lies in the fact that it aids management in Planning, Control, Motivation and Direction; thus a close relationship exists between Industrial accounting and Industrial management. In these days of large scale production, complexity in management, ever-increasing threat of changes in price levels and ever mounting competition in the business fields, Industrial Accounting plays a vital role as a “Language of business”.

Government and Municipal Accounting – It specializes in the transaction of political units, such as states and municipalities. It seeks to provide useful accounting information with regard to the business aspect of Public Administration. The main accounting problem in governmental units is to maintain records to Tax returns and preparation of budgets for future revenue and expenditure. Detailed studies of Government and Municipal Accounting are made in a separate chapter.

Social Accounting – Social Accounting is to deal with measurement of Social and National Income and National wealth. Economics studies man in his relation to income and wealth, and as such Social Accounting is closely connected with Economics. Social Accounting has been used in Economics for a very long time in connection with measurement of National Dividend i.e., National Income. However, the application of Double Entry System of Accounting to the Accounting to the problem of measurement of National Income and National Wealth is of recent origin. In Social Accounting neither personal liking should be considered, nor should it be influenced by Income tax requirements. It should be essentially based on scientific, impersonal and broad outlook.

Social Accounting is to deal with the macro-model rather than micro-model. Mutual help and cooperation of Economists and Accountants that Social Accounting or National Income Accounting can be developed as an all proof technique for measurement of National Dividend and National Wealth.




In Social Accounting it is not possible to record all the national transactions taking place every day. So, Double Entry technique can be applied in the pattern it is used for preparation of consolidated Balance Sheet. Actually Social Accounting seeks to measure social income and disposal thereof in terms of social consumption and social savings. In social accounting we are not interested in money, as money is not assets from social point of view whereas it is quite good assets in private hands. So, in Social Accounting Real Income, Real Consumption, Real Savings and Real Capital are to be found out rather than these items in monetary terms. But for expression in common terms money must be taken as a unit. That is why the unit is to be taken at standard money values or stable money value. Depreciation is also considered on replacement cost basis rather than on Historical cost basis.
               
In discussing social accounting reference must be made to the Keynesian Formulae of Savings and Investment. Accounting to Keynes, National Income (Y) is equivalent to National Consumption (C) plus National Investments (I), as the income may be either consumed or invested consumed or invested. On the other hand, National Savings (S) is the difference between National Income and National Consumption, as saving is always the excess of the income over expenditure.
               
Thus,                           Y=C+I          ……………………………………………….. (1)
                                    S=Y-C          ............ ……………………………………….. (2)
Now from (2)           - Y=-S-C
                    Or,          Y=C+S          ........................... …………………………….. (3)

Now from (3) and (1) C+S=C+I
                    Or,          S=I                .................................................………………. (4)

The technique of private accounting is very largely related to record and statement in terms of historical costs and historical revenues. Social accounting, on the other hand, may require a development of this technique in terms of either a current money measure or a standardized money measure of real things, particularly when it comes to such questions as national capital aggregates, asset and inventory formations and so on. Social accounting does very largely resolve itself into a matter of the aggregation of private accounting statements, particularly in relation to the business enterprise sector of the national economy.

                The national income and other similar aggregate are obtained from the complete system of social accounts particular to any one national economy by a process of selecting and bringing together a number of the constituent entries in the accounts. Thus, the national income is calculated by combining the income shares of the factors of production in the forms of wages and salaries, interest, operating surpluses and next dividends received from the rest of the world. Again, a statement of the national income in terms of income payments may be built up with a clear indication of the relation between national income and gross national product, with a breakdown of the gross national product in terms of an expenditure classification. 

Once more it should not be overlooked that complete adoption of accounting technique to the point of the preparation of an aggregated national balance sheet will give a reasonably clear indication of the make-up of the national capital. This balance sheet deals with the business enterprise sector only, but clearly it should not be impossible to devise similar balance sheet forms for the other sectors, and then to bring these balance sheets together and then in the shape of one such document for the whole national economy. Thus, it is plain that a Social Accounting set up on the lines which have been indicated should promote a clear understanding of the elemental groups of transactions entering into the calculation of significant national aggregates, and their inter-dependence on one another.
                
 Professor Richard Stone of Cambridge University remark, “Social Accounting is concerned with the statistical classification of activities of human beings and human institutions in ways which help us to understand the operation of the economy as a whole.”

Social accounting is only used in contradistinction to private accounting, and helps to compute national income.