Accountingvs. Accountancy: “knowledge consisting of principles,
postulates, assumptions, conventions, concepts and rules of recording
classifying and analyzing financial transactions is accounting. Increasing
demands made on accounting by different interested parties such as owners,
management, creditors, taxation authorities etc the various branches have come
into existence. Financial accounting the object of financial accounting and
financial accounting determine the result of business profit & loss during
the particular period and balance sheet as on a date at the end of the period.
Accountingvs Book-keeping: Book-keeping concerns recording
correctly and in a set of books of those transactions that result in the
transfer of money or money's worth. It extends to classifying, summarizing,
presenting and even analyzing accounting information.
The purpose of cost
accounting is to find out the cost of goods produced or services. It also helps
the business in calculating the costs by signifying avoidable losses and
wastes. The object of management accounting is to supply relevant information
within a time to the management to allow it to take decision and effect
control. In this, we are concerned only with financial accounting. The objects
of financial accounting is to record the financial transactions in a systematic
manner according to a set of principles. The recorded information has to be
classified, analyzed and presented in a manner in which business results and
financial position can be ascertained.
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Accounting plays
important and useful role by developing the accounting information.
Accounting is useful in
the following respects :-
(1) Increased volume of
business results in large number of transactions. Accounting records prevent all
necessary information to remembering various transactions.
(2) Accounting record consistent
of basis practices will enable a business to compare results of one period with
another period.
(3) Taxation
authorities (both income tax and sales tax) are likely contained in the set of
accounting books if maintained according to generally accepted accounting principles.
(4) If a business is to
be sold as a going concern then the values of different assets as shown by the
balance sheet helps in bargaining proper price for the business.
There are many
advantages of accounting but in this section we discussed limitation of
accounting.
Following are the
limitations:
Financial accounting has
different alternative treatments. Accounting is based on concepts and it follows
“generally accepted principles" but there exist more than one principle
for the treatment of any one item. All these treatments can do within the
framework of generally accepted principles. For example, the closing stock of a
business may be valued by anyone of the following methods: FIFO (First-in-
First-out), LIFO (Last-in-First-out), Average Price, Standard Price etc., but
the results are not comparable.
Financial accounting
does not provide timely information
Financial accounting is
designed to supply information in the form of statements (Balance Sheet and
Profit and Loss Account) for a period normally one year. The business requires
timely information at everyday intervals to enable the management to plan and
take action. For example, if a business has budgeted that during the current
year sales should be $ 15,00,000 then it requires information whether the sales
in the first month of the year amounted to $ 13,00,000 or less or more?
Traditionally,
financial accounting is not supply information at shorter interval less than
one year. With the beginning of computerized accounting software like HiTech
Financial Accounting displays monthly profit and loss account and balance sheet
to overcome this limitation. For example, in order to determine the amount of
depreciation to be charged every year for the use of fixed asset it is required
estimation and the income disclosed by accounting is not authoritative but
'approximation'.
Financial
accounting ignores non-financial information
Financial accounting
does not consider of non- financial in nature. For example, degree of
competition by the business, technical innovations taken by the business,
loyalty and efficiency of the employees; changes in the value of money etc. are
the important matters in which management of the business is highly interested
but accounting is not modified to take note of such matters. Thus any user of
financial information is, naturally, underprivileged of vital information which
is of non-financial.
The information
supplied by the financial accounting is in reality aggregates of the financial
transactions during the course of the year. Of course, it enables to study the
overall results of the business the information is required regarding the cost,
revenue and profit of each product but financial accounting does not provide
such detailed information product- wise. For example, if business has earned a
total profit of say, $ 5,00,000 during the accounting year and it sells three
products namely petrol. diesel and mobile oil and wants to know profit earned by
each product Financial accounting is not likely to help him unless he uses a
computerized accounting system capable of handling such complex queries. Many
reports in a computer accounting software like HiTech Financial Accounting
which are explained with graphs and customized reports as per need of the
business overcome this limitation.
Financial Accounting
does not disclose the present value of the business
In financial accounting
the position of the business as on a particular date is shown by a statement
known as 'Balance Sheet'. In Balance Sheet the assets are shown on the basis of
"Continuing Entity Concept. Thus it is presumed that business has
relatively longer life and will continue to exist indefinitely, hence the asset
values are 'going concern values.' The 'realized value' of each asset if sold
to-day can't be known by studying the balance sheet”.