FAA/U1 Topic 1 Meaning and Scope of Accounting
Accounting is basically the systematic process of handling all the financial transactions and business records. In other words, Accounting is a bookkeeping process that records transactions, keeps financial records, performs auditing, etc. It is a platform that helps through many processes, for example, identifying, recording, measuring and provides other financial information.
Accounting is the language of finance. It conveys the financial position of the firm or business to anyone who wants to know. It helps to translate the workings of a firm into tangible reports that can be compared.
Accounting is all about the process that helps to record, summarize, analyze, and report data that concerns financial transactions.
Accounting is all about the term ALOE. Do not confuse it with the plant! ALOE is a term that has an important role to play in the accounting world and the understanding of the meaning of accounting. Here is what the acronym, “A-L-O-E” means.
- A – Assets
- L – Liabilities
- E- Owner’s Equity
This is one of the basic concepts of accounting. The equation for the same goes like this:
Assets = Liabilities + Owner’s Equity
Here is the meaning of every term that ALOE stands for.
(i) Assets: Assets are the items that belong to you and you are the owner of it. These items correspond to a “value” and can serve you cash in exchange for it. Examples of Assets are Car, House, etc.
(ii) Liabilities: Whatever you own is a liability. Even a loan that you take from a bank to buy any sort of asset is a liability.
(ii) Owner’s Equity: The total amount of cash someone (anyone) invests in an organization is Owner’s Equity. The investment done is not necessarily money always. It can be in the form of stocks too.
Scope of Accounting
Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, the is also the need for interpretation and communication of those information to the appropriate persons. Only accounting use can help overcome these problems.
In the modern world, accounting system is practiced no only in all the business institutions but also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc.and also Government and Local Self-Government in the form of Municipality, Panchayat.The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some suitable types of accounting methods. As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions.
The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems.