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Maharshi Dayanand University ROHTAK Maharshi Dayanand University Accounting Theory Accounting Postulates ROHTAK Qklhokn 1
Accounting Theory
Paper-8
M. Com. (Final)
Directorate of Distance Education
Maharshi Dayanand University
ROHTAK – 124 001
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Copyright © 2004, Maharshi Dayanand University, ROHTAK
All Rights Reserved. No part of this publication may be reproduced or stored in a retrieval system or
transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise,
without the written permission of the copyright holder.
Maharshi Dayanand University
ROHTAK – 124 001
Developed & Produced by EXCEL BOOKS PVT. LTD., A-45 Naraina, Phase 1, New Delhi-110028
Qklhokn 3
Contents
Chapter 1 Accounting-An Intoduction 5
Chapter 2 The History and Evolution of Accounting Thoughts 23
Chapter 3 Approaches to Accounting Theory 56
Chapter 4 Accounting Postulates, Concepts and Principles 88
Chapter 5 Income Concepts 107
Chapter 6 Revenues, Expenses, Gains and Losses 139
Chapter 7 Valuation of Assets 158
Chapter 8 Liabilities and Equity 177
Chapter 9 Depreciation Accounting and Policy 192
Chapter 10 Inventories and their Valuation 238
Chapter 11 Financial Reporting 277
Chapter 12 Specific Issues in Corporate Reporting 302
Chapter 13 Harmonization of Financial Reporting 323
Chapter 14 Accounting for Price Level Changes 339
Chapter 15 Human Resource Accounting 397
Chapter 16 Financial Engineering: A Multi-Disciplinary Approach to Risk-Return Management 421
Chapter 17 Accounting Standards 429
Chapter 18 Elementary Knowledge of Indian Accounting Standards 474
Chapter 19 Lease Accounting 512
Chapter 20 Social Accounting 542
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Accounting Theory
Paper-8 Max. Marks.: 100
Time 3: Hrs
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out of which candidates are required to attempt any seven questions. Section C will be having 5 questions of
15 marks each out of which candidates are required to attempt any three questions. The examiner will set the
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Course Inputs
Ui-
nt1 Fundamentals: Meaning, Need Nature, Classification, Evaluation, Role and Users of Accounting and
Accounting Theory, History of Accounting Thoughts. Approaches to Accounting Theory. Accounting
Postulates, Concepts and Principles.
Ui-
nt2 Income Measurement: Concepts of Income Revenues, Expenses, Gains, losses, Assets, Liabilities and
Equity. Depreciation Method, Depreciation and Indian Companies Act, Inventory: Inventory Coating
methods. AS-2 on valuation of Inventories.
Ui-
nt3 Corporate Reporting: Financial Reporting: Concept and development of Financial Reporting (including
True blood Report, The Corporate Report, FASB Concept No. 1, Stamp Report). Specific Issues in
Corporate Reporting: Segment, Social and Interim Reporting. Harmonization of Financial Reporting
(including IASCs Guidelines.)
Ui-
nt4 Contemporary Issues in Accounting: Accounting for Changing Prices, Human Resource Accounting.
Financial Engineering (A Multi-disciplinary Approach to Risk Return Management)
Ui-
nt5 Accounting Standards: Formation, Meaning, Benefits and Management of Accounting Standards, Process
of Standards setting in India, U. K. and U.S.A. Elementary knowledge of Indian Accounting Standards.
Lease Accounting Social Accounting.
Accounting-An Intoduction 5
Chapter 1
Accounting-An Intoduction
Accounting is generally termed as the language of business throughout the world. The
language is the means of communication of ideas or feelings by the use of
conventionalised signs, gestures, marks and articulated vocal sound. In the same way,
the accounting language seaves as a means to communicate matters relating to various
aspects of business operations. As the individual business enterprises keep their
accounting records separately, the offer to communicate is essentially from a business
enterprise to various individuals, groups and institutions that are having interest in the
operations and results of that enterprise. Now, although accounting is generally
recognised with the business, trade and profession, the business enterprise is not the
only kind of organisation that makes use of accounting. Legal entities ranging from
individual to governments use and prepare accounting to obtain information on the
financial condition and performance of the entity in question. Just as the business
enterprises (like firms, companies, societies and institutions keep their accounts, so can
the nations and even the individual owners of the business and profession entities.
It is necessary to have a good knowledge of accounting-grammar (in the shape of
construction of accounts, conventions, concepts, postulates, principles, standards etc.)
to interpret accounting information for purposes of communication, reporting, decision
making or appraisal.
Definition of Accounting
The role of accounting then is that of communicating the results of the operations of a
business. How does accounting accomplish this ? This is best understood by commonly
accepted definition of accounting : “Accounting is the art of recording, classifying and
summarising 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.
(AICPA) ”
The art of recording involves putting into writing or in print the transactions of financial
character, reasonably soon after occurrence, in the records maintained by the company
e.g. cash book, day books, journals, memoranda books, etc. This part of accounting is
essentially concerned with not only ensuring that all business transactions of financial
character are in fact recorded but also that they are recorded in an orderly manner. For
example, when a business executive has to travel in connection with his work, he will
ask the cashier in the company’s accounts department to advance funds for meeting
his travel expenses. On receipt of the memo from the executive, the cashier will prepare
a voucher, hand over the cash to the executive against his signature acknowledging
receipt of the cash advance. This transaction will then be appropriately recorded in the
cash book and the “travel advances” account of the ledger. When the executive returns
from the business trip, he will prepare a statement of his travel expenses (usually called
Travel Allowance Bill or T.A. Bill), get it approved by his superior (if required by the
6 Accounting Theory
regulations in this regard), and send it on to the accounts department. If he has spent
less than the amount originally advanced, he will return the balance amount in cash
along with the travel statement. The accounts department, after verification of the
statement to ensure that the expenditure is in conformity with prescribed regulations
will make appropriate entries in the cash book and other accounting records and suitably
adjust the “travel advances” account. If the amount spent is greater than the original
advance, the balance amount will be paid to the executive and the required entries will
be made in the accounting records.
The art of classifying is concerned with the systematic analysis of the recorded data
so that items of like nature are classified under appropriate heads. This accounting
classification is usually done by maintaining ledgers with individual account heads under
which all financial transactions of a similar nature are collected. For instance, continuing
with the earlier illustration, the original advance will be classified by entries in the cash
book (or cash account) leading to a reduction of cash held by the company and in the
“travel advances” account in the ledger, thereby increasing the amount of such advances
outstanding. On receipt of the travel expenses statement, the balance amount of cash,
received from or paid to the executive (as the case may be), will be entered in the cash
book the “travel advances” in the ledger will be reduced by adjustment of the accounts
rendered and the “travelling expenses” account in the ledger will be posted with the
amount by way of accounting of such expenses incurred in connection with the operations
of the enterprise. In the process, the events of the original cash advance and
the subsequent incurrence of travel expenses are classified under three relevant heads
– namely, cash account, travel advances account and travelling expenses account.
The art of summarizing in a significant manner consists of presenting the classified
data in a manner which is useful to the internal and external end-users of accounting
statements. At the end of stipulated periods (usually a month for internal purposes and
a year, for external reporting purposes as required by corporation law), the accounts in
the ledger will be balanced as at the end of that period. The accountant will check (or
“try”) the accuracy of the accounts by preparing a trial balance of all ledger accounts
as at the end of that period. This process leads to the preparation of financial statements
like the Balance Sheet, Income Statement (or Profit and Loss Account as it is often
called), Source and Application of funds statement, cost statements, internal reports to
management, etc.
The final function of accounting is the interpretation of the summarized data in such a
manner that the and-user can make meaningful judgements about the financial condition
or the profitability of the business operations or can use the data in preparing future
plans and laying down policies to execute such plans. After the monthly accounting
statements for internal purposes have been prepared, the chief accountant or controller
will prepare analytical notes appraising the performance of the enterprise and its various
units or departments (as reflected in the accounting statements prepared) in relation to
the expected performance and highlight areas of shortfall in performance so that
management can take appropriate remedial action for overcoming such shortfalls.
Similarly, in respect of the annual statutory accounts, the accountant will prepare a note
analyzing the results of operations for the year for the consideration of the Board of
Directors. Thereafter, the directors will include their comments analysing the results
reported in their report annexed to the final-accounts of the year.
Accounting-An Intoduction 7
There is no single or unanimously accepted definition of accounting. Why ?
Generally, definition either formally or informally specifies the meaning of a
phenomenon or object in question. A definition sets boundaries to a phenomenon or
subject indicating not only what it is, but also what it is not. A definition answers questions
like, “What are its features ? What is its history or what does it do and how is it related
to other phenomenon ?” Very often definition depends on our purpose or intention with
the given matter. Accordingly, definition of accounting is bound to “come closer to our
own interpretation of the scope of accounting, and the manner in which we would like
to treat its subject matter”. In a rapidly changing socio-economic conditions the subject
matter of accounting is also changing. Accounting which initially began as the art or
science of record-keeping, is moving towards adoption of a dynamic role which also
emphasises its social goal. This is clearly evident from some of the definitions presented
below :
(i) Accounting as a recordkeeping device : The definition of the American Institute
of Certified Public Accountants highlight record-keeping as an essential attribute
of accounting. Accordingly “Accounting is the art of recording, classifying and
summarising in a significant manner and in terms of money, transactions and
events which are, in part at least, of a financial character, and interpreting the
results thereof.”
(ii) Accounting as an information system : The definition of the American
Accounting Association highlights communication aspect of accounting for
decision-making by a wide variety of users. This user-oriented definition of
accounting “refers to the process of identifying, measuring and communicating
economic information to permit informed judgements and decisions by users of
the information”.
To Robert Sterling, accounting stands for a measurement communication process.
According to him, “Accountants ought to measure something and then
communicate the measurement to the people who will make the decisions. Under
this interpretation, the outputs of the accounting system are the inputs to decision
theories”.
(iii) Accounting as a service activity : A later definition of the Accounting Principles
Board of the AICPA endorses the views of American Accounting Association
about the elements of decision making embedded in accounting : “Accounting is a
service activity. Its function is to provide quantitative information, primarily financial
in nature, about economic entities that is intended to be useful in making reasoned
choices about the alternative course of action.”
W.A. Paton, however, attempts to elicit a definition of accounting from the
structural viewpoint “Accounting is a synthesis of concepts, rules and techniques
designed to facilitate understanding and control of economic activity.”
(iv) Accounting as a dynamic social science : According to Glautier and Underdown,
accounting is a social science. They observe that “The history of accounting
reflects the evolutionary pattern of social developments and in this respect, illustrates
how much accounting is a product of its environment and at the same time a force
for changing it. There is, therefore, an evolutionary pattern which reflects changing
socio-economic conditions and changing purpose to which accounting is applied”.
8 Accounting Theory
The Nature of Accounting
According in its essence is a function that aims to accumulate the communicate
information essential to the understanding of the activities of an entity. It is an obstraction
of the real world economic events. The distinctive nature that makes accounting a
unique system is as follows :
(i) Accounting as a process : Accounting is a process which involves gathering,
compacting, interpreting and disseminating economic information in a systematic
way.
(ii) Stewardship function : Accounting is a stewardship function. Its basic goal is to
report on the resources and obligation of the entity to the owners. Through the
medium of financial statements it communicates to the interested parties of the
contributions and relative rights of the economy segments– the shareholders/owners,
creditors and others.
(iii) Concepts and conventions : Since accounting is a process that aims at
communicating economic information, it must rely on a set of previously agreed
concepts, conventions and rules. These rules and conventions are not discovered
but they are contrived and mutually agreed upon.
(iv) Accounting as a means to an end : Although accounting system is characterised
by a host of rules, procedures and conventions, they are not the end by themselves.
The ultimate end of accounting is to provide external information-communication
system by gathering, compacting, interpreting and disseminating economic data
which gives a financial representation of the relative economic rights and interests
of the economy segments, in order to facilitate judgement formulation and action
taking by its users.
(v) Accounting as an art : Accounting is more of an art than a science, its logical
foundation is not deeply embedded in scientific or natural law. It is essentially and
fundamentally utilitarian in nature, therefore, its methodologies are primarily based
on expediency and upon actual day to day needs of the business community.
Functions of Accounting
Accounting being an indispensible part of business system, it is important to delineate
precisely its functions. But unfortunately the accountants are not unanimous about the
exact functions of accounting, neither is there any authoritative pronouncement that
can remove disagreement about the probable functions of accounting.
D.R. Scott observed that accounting has three major functions to do. These are record-
keeping function, the control function and the protection of equities function ? Maurice
Moonitz, however, defines accounting in terms of five basic functions of accounting.
According to him, “The function of accounting is (1) to measure the resources held by
specific entities; (2) to reflect the claims against and the interests in those entities; (3)
to measure the changes in those resources, claims and interests; (4) to assign the changes
to specifiable periods of time; and (5) to express the foregoing in terms of money as a
common denominator.”
A.C. Litteton on the other hand, identifies six areas of “accounting actions”. These are:
(i) homogenising diverse events; (ii) converting events into entries; (iii) classifying
entries into accounts; (iv) reclassifying account data into fiscal periods; (v) summarising
and reporting periodic data; and (vi) reviewing accounting data and processes.
Accounting-An Intoduction 9
Elsewhere, Littleton states that “accounting has one function–to furnish dependable,
relevant information about business enterprise.”
Although diverse opinions have been expressed above about the functions of
accounting, the most common perceptions about the functions of accounting are as
follows :
(i) Recording function : According is essentially a recordkeeping function of the
past, present and future economic events of the business. The recording function
involves techniques of information gathering and processing.
(ii) Summarising function : The next important function of accounting is summarising
diverse economic data into homogeneous group or unit called account. It is most
important function of accounting since just like our language system, accounting
communicates economic information to its users through these accounts.
(iii) Accounting as a medium of communication between the firm and the
external parties: Accounting is not an end in itself, but it exists to serve a purpose.
The purpose is to supply reliable and dependable information about the economic
chronicles of the business for the purpose of decision making by the interested
parties.
(iv) Income determination : “Net income determination under the historical cost
method lies at the heart of the whole accounting methodology, “says Campfield”
Income is the basic measure that provides information about the periodic progress
of business. It also provides the basic rationale for being in business.
(v) Preparation of balance sheet : Balance sheet is very often stated as a statement
of financial condition that purports to show the economic resources, obligations
and owner’s equities of the business at periodic interval of time. Some views
however, consider it as a mere statement of balances of the unallocated costs that
has not been assigned to the income statement. Despite difference of opinions
about the exact nature of balance sheet, accountants have found its preparation
extremely useful.
(vi) Control function : Accounting is a special type of calculative service that comes
handy to the management for the purpose of exercising control over many functional
areas of business.
(vii) Compliance with legal requirements : In modern days accounting is not merely
an act of prudence to exercise control, but its necessity arises from the need of
compliance with many legal requirements. For example, the provisions of the
Indian Companies Act makes it obligatory for every company to prepare a
statement of profit and loss and balance sheet at the end of each accounting
period.
Objectives of Accounting
Although the terms, definition, function and objective are very often used
interchangeably there is presumably a distinction among them. As stated earlier,
definition describes what a thing is, while function describes what it does and
objective, describes what it intends to do.
10 Accounting Theory
Thus, when we speak of objective, we rationalise the thinking process to formulate a
set of attainable goals, with reference to the circumstances, feasibility and constraints.
Deciding about the objectives of accounting, therefore, requires perceptions about the
environment in which accounting system works. “The environment of accounting has a
direct bearing on the objectives of accounting and on the logical derivation of principles
and rules.”
The accounting environment generally comprises the firm (i.e., the entity which prepares
financial statements), different groups of external users and the existing legal and
economic environment. The feasibility and constraints imposed by the accounting
environment provides the boundary of accounting objectives.
Evolution of accounting objectives : Accounting as we see today was not certainly
the same when it began. Its techniques and methodologies have changed through as
evolutionary process. The same is true about the objectives of accounting.
The system of double entry accounting can be traced back to at least 13th century
when it began as an outgrowth of record-keeping function that made possible orderly
and organised record of past activities of the business. But over the years it has turned
out to be an important mechanism to accumulate and communicate economic information
essential to the understanding of the activities of an enterprise in its social set up. Today,
accounting is widely regarded as an information system with an objective of effective
transmission of information revealing past, present and prospective socio-economic
activities of business to a wide spectrum of users.
But at the first instance, the basic objective of accounting is to render stewardship
services to the owners. This purpose has become all the more important with the diffusion
of ownership in corporate business that separated ownership from management. In
consequence, stewardship function has become predominant over record-keeping. The
managers of the business as steward are responsible for protecting the interests of the
owners as well as the assets of the business. The basic objectives of accounting in such
cases are :
(i) To measure the resources held by the entity,
(ii) Protection of equities, i.e., to measure the claim against those resources by the
owners and out-siders, and
(iii) To measure the results and financial condition of business.
Notwithstanding this, accounting may pursue many other goals that may arise from the
specific information needs of the owners/managers for the purpose of management
control and meeting legal requirements. Since the middle of the present century, however,
a shift of emphasis of accounting objectives have begun. Increasing legal control and
wide-spread public interests in corporate business have broadened the scope and objective
of accounting. This in clearly manifest in the APB statement No.4 which entails an
elaborate list of objectives of accounting. The APB’s list of objectives marks a sustantial
departure from the trend of the contemporary accounting literature which had never
given significant attention to why accounting was done. APB’s objectives of accounting
may be broken into two distinct aspects-the general objectives and the qualitative
objectives.
Accounting-An Intoduction 11
The general objectives of accounting according to the APB are :
(i) To provide quantitative financial information about a business enterprise that s
useful to the users, particularly the owners and creditors, in making economic
decisions.
(ii) To provide reliable financial information about economic resources and obligations
of a business enterprise.
(iii) To provide reliable information about changes is not resources of an
enterprise that result from its profit directed activities.
(iv) To provide other needed information that assists in estimating the earning potential
of the enterprise.
(v) To provide other needed information about changes in economic resources and
obligation.
(vi) To disclose, to the extent possible, other information related to the financial
statements that is relevant to the user’s needs.
The qualitative objectives of accounting, according to the APB are : (i) relevance, (ii)
understandability, (iii) verifiability, (iv) neutrality, (v) timeliness, (vi) comparability, and
(vii) completeness.
A notable feature of the APB’s objective of accounting is that it could not
transcend beyond the stewardship objective. The true blood Committee Report on “The
Objectives of Financial Statements” which was published in 1973, however, went beyond
the traditional orientation of accounting toward reporting on stewardship. The committee
emphasised on providing investors and creditors with information “for predicting,
comparing, and evaluating potential cash flows to them in terms of amount, timing and
related uncertainty.” The committee also emphasised the social objectives to accounting
stating that “An objective of financial statements is to report on the activities of the
enterprise affecting the society which can be determined and described or measured
and which are important to the role of the enterprise in its social set up”.
Users of Accounting Information
(1) External Users
In order to understand the communication process, we might ask ourselves who are the
people interested in the operations of a business enterprise. There are several entities
outside the business (or in other words, external to it), which are interested in its
operations because of their business dealings with the enterprise. There are individuals
or organizations who have economic transactions with the business, e.g. suppliers of
goods and services on credit, banks or financial institutions lending money either for a
short or a long period, buyers of goods and services produced by the enterprise on the
basis of stipulated targets, contractors who have undertaken to build plants and buildings
and other facilities for the business. They are all interested in varying degrees in the
operations of the businesses with which they deal in order to determine whether the
enterprise is credit worthy and the terms under which credit can be extended, i.e. the
amount of goods or services that can be sold on credit (or the loans that can be advanced),
the period of such credit and the likelihood that the debt arising out of the transactions
would be repaid in time.
12 Accounting Theory
The external group is by no means limited to such individuals or organizations who have
economic transactions with the business. Regulatory agencies, i.e. government
departments or other agencies who are charged with the responsibility for regulating
general business activity or particular types of business are also naturally interested in
the operations of the business. Some of the government departments having general
interest, in the Indian context, are the Company Law Board, Registrar of Companies,
Income Tax Department, Ministry of Industrial Development, Ministry of Foreign Trade,
etc. Government organizations looking after particular product groups are Ministries of
Steel, Petro-chemicals, Agriculture, Health, etc. as also officials and bodies designated
for overseeing particular activities like Drugs Controller, Cost and Prices Bureau, Tariff
Commission, etc. Some of the government departments are specifically charged by
law to regulate the operations of a particular group of companies, e.g. the State Electricity
Boards. The interest of the regulatory agencies is essentially to ensure that
the enterprise :
(a) complies with the requirements of the law relating to financial transactions, e.g. it
pays the required amount of tax, does not overtrade on its capital, pays dividends
to its shareholders out of the profits, provides depreciation according to prescribed
norms, etc;
(b) discloses its capital, retained earnings, profits, sales and costs to the public at
large so as to submit its activities to public scrutiny;
(c) provides data relating to its borrowings (and the assets charged or mortgaged for
raising such loans) so that future lenders are provided with the required information
regarding the present level of borrowings and the state of the security provided by
the assets, etc.
Obviously, the balance sheet and the income statement prepared in consonance with
the requirements of the disclosure provided in the law would be of great help to the
regulatory agencies in these matters.
The third category of external users consists of those who have neither any economic
transactions nor are concerned with regulation of business activities but are interested
in the operations of the business on behalf of constituents which they represent, i.e., as
representatives of external interests. In this category can be included labour unions,
stock brokers, chambers of commerce, trade associations export agencies, etc., These
bodies would like to ensure that their members’ or clients’ interests are safeguarded in
terms of the required degree of financial viability of the enterprise with which they deal
or that the revenue costs and profits of the enterprises are disclosed fairly so as to
enable their members or clients to determine accurately, in financial terms, the quantum
of economic transactions, for instance, bonus to be paid to the members of a trade
union or dividends to be paid to investors.
In other circumstances, a person or a body might be interested in the results of the
operations of a business for determination of claims or resolution of disputes, e.g. a
court deciding upon the ownership of shares as between two claimants or judging the
merits of a claim against a business in liquidation, an arbitrator settling a dispute between
a business organization and the suppliers of goods and services to that business or a tax
tribunal assessing a claim of a business enterprise for income tax relief.
Lastly, the external group would include, on the one hand, the auditor of the business
who is required by law to certify the accounts and, on the other, the prospective
Accounting-An Intoduction 13
shareholders who wish to subscribe for shares of a business enterprise or want to buy
an already-issued share from another shareholder. Other persons who would be interested
in the business, even though they may not be directly concerned, are the business
economists analysing the business enterprise’s success or the financial press providing
information to their reader regarding the operations of the business world.
Internal Users of Accounting Information
It is not difficult to conclude that the internal people who would be most interested are
the owners of the business. The owners are proprietors in proprietory concerns and the
partners in partnership businesses, while in the case of a
company (or corporation, as it is sometimes called) the legal owners of the
company are the shareholders. Shares may be held by individuals or companies or
corporations or even the government. Clearly, the owners would like to know :
(a) whether the enterprise made any profit during the period reported and if so, what
the dividend prospects are ;
(b) whether the financial condition of the enterprise is sound as reflected in its capital
to retained earnings ratio, current assets to current liabilities ratio, funds flow
statement, etc.;
(c) whether these operations are profitable in terms of return on funds
invested or return on assets, profits per rupee of sales, gross margin per unit of
sales, etc.;
(d) whether the growth of its sales are in line with the expectations of the shareholders;
(e) whether its costs are in line with the volume of sales and norms of costs in similar
enterprise elsewhere.
There might be individual shareholders who are interested in greater financial details
relating to the operations of a company, but the average shareholder would expect to
find answers to the questions set out above in the balance sheet and the income statement
prepared by the enterprise for purposes of external reporting.
However, the owners are not the only persons within the company (or the internal
group) who are interested in the various aspects of the operations of a
business. With the separation of management and ownership, managers at
various levels beginning from shop floor superintendent to the Chairman and Chief
Executive, are also interested in the business. Some of their needs for accounting
information relate to :
(a) setting up targets for future periods, usually the next financial year;
(b) measuring the performance of the various units of the business as also the enterprise
as a whole;
(c) evaluating the performance in relation to the targets set up;
(d) highlighting the areas of shortfalls from planned performance; and
(e) taking remedial action for overcoming such shortfalls.
Most of this information would be financial in nature and would essentially be prepared
from the accounting records. However, it would require special knowledge and skill to
assemble the data and to present them in meaningful terms for resolution of the
managerial problems outlined above.
14 Accounting Theory
The last category of persons belonging to the internal group who are interested in
ascertaining the financial condition of the companies for the resolution of their problems
are the employees of the business.
What are some of the things in relation to the operations of a business which would be
of interest to an end-user ? The external end-users would essentially be interested in
the determination of financial position and profitability, while the managers of the
enterprise (or internal end-users) would emphasise the development of data for
performance appraisal, decision making and planning. Accordingly, the more important
uses of accounting relate to development of information for providing answers to questions
like :
(i) How good or bad is the financial condition of the business, generally ?
(ii) Have the operations of the business as a whole resulted in a profit (or surplus) or
a loss (or deficit) ?
(iii) How well have the different functions or departments performed and how
successful have been the results of individual activities or products ?
(iv) What are the likely results of new decisions to be made or old decisions which are
to be modified ?
(v) In the light of the past results of operations, how should the business enterprise
plan its future activities to achieve expected results ?
Scope of Accounting
Accounting is a highly organised and integrated discipline, the usefulness of which have
been found in diverse areas of socio-economic activities. Although,
accounting basically started as a device for recording economic events by the business
enterprise in the pursuit of its profit motive, the scope and method of the discipline lend
itself to wide social application. The basic orientation of the discipline being information
communication it can be applied to the measurement and communication of data revealing
past, present and prospective socio-economic activities to improve control methods and
decision-making at levels of socio-economic activities. Thus, accounting as the
measurement and communication of social data is ubiquitous, always playing a
constructive role. The tools and techniques of the discipline can be used in a diverse
field of human activities that require some sort


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