What is accounting?

The systematic recording, reporting, and analysis of financial transactions of a business.

Accounting is an information science used to collect, classify, and manipulate financial data for organizations and individuals.

"Accounting is a process of recording, summarizing, analyzing and recording of financial transactions of an enterprise."

Accounting is one of the most important functions of any business enterprise. It is often referred to as "Language of

Business". The origin of accounting can be traced back to ancient civilizations and over the years it has evolved.

Accounting can be divided into various fields like financial accounting, management accounting etc.

Both financial accounting and management accounting forms part of business accounting. Financial accounting focuses on

statutory reporting whereas management accounting focuses on reporting information for internal use by management.

Importance of Business Accounting

Accounting is a service activity. It is important as it provides quantitative information of financial nature to various stakeholders which
is intended to be used in making economic decision. These stakeholders include investors, management, government, suppliers,
financiers, regulators etc. Business accounting help in making a number of short term and long term business decisions which helps
an enterprise to grow as well as penetrate in market.

The three major statements which is generated by Business accounting system are as follows:

1. Profit & Loss Account (Income Statement) Income statement shows the net income generated/net loss incurred by an
enterprise during a particular accounting period.

2. Balance Sheet or Statement of financial position Balance sheet statement shows the financial position of an enterprise as
on particular date. Closing balance of various assets and liabilities are reported in balance sheet. The excess of assets over
liabilities is capital.

3. Cash Flow Statement Cash Flow Statement shows how changes in balance sheet and income statement which affect cash
and cash equivalent. Basically it shows cash inflows and outflows among operating, investing and financial activities of an
enterprise.These three statements when combined together forms Financial Statements . The financial statements are required by
all the stakeholders.

In todays dynamic and complex business environment it is very important to keep our accounting records clean and up to date.
Proper accounting is important to any enterprise because of the following reason

Helps in evaluating the performance of business - As discussed above, the accounting records reflects the results of operations
as well as statement of financial position. Also various balance sheet and profit & loss accounts ratios are calculated which help user
of financial statements to analyze the performance of an entity. For example debt equity ratio, Current ratio, Turnover ratio etc. Also
we can compare previous period accounting data with current period as well as budgeted figures for variance analysis.

Helps to manage and monitor cash flow The working capital and cash requirement of an enterprise can be duly taken care by
proper accounting system.

Helps business to be statutory compliant Proper business accounting ensures timely recording our liabilities which needs to be
paid within the prescribed time line. This includes provident fund, pension fund, VAT, sales tax, Income tax. Timely payment of
liabilities helps enterprises to be statutory compliant.

Helps to create budget and future projections - Accounting data helps an enterprise to prepare budget and forecast for future
period. Business trends are projected based on past data produced by accounting system.

Helps in filing financial statements with regulators, stock exchanges and filing of tax returns Enterprises are required to file
the financial statements with ROC. In case of listed entities the same is required to be filed with stock exchanges as well. For both
indirect and direct tax filing purposes, financial statements and other financial information are required.

Other information The accounting system provides a number of qualitative and quantitative customized reports which are
required in day to day business activities.

For the above we can conclude that accounting is very important for any enterprises whether listed or unlisted, profit oriented or not
for profit, Government or private.

Limitations of AccountingFinancial accounting is significant for management as it helps them

to control the firm activities and in determining appropriate managerial policies in different areas production, sales,
administration, finance etc.However, financial accounting does not provide adequate and useful information. Most of
limitations are mainly due to the cumulative effect of recorded facts, accounting conventions and personal judgments
on financial statements.Financial accounting suffers from the following limitations which have been
responsible for the emergence of Cost and Management Accounting:

Transactions of non-monetary nature do not find place in accounting. Accounting is limited to monetary
transactions only. It excludes qualitative elements like management reputation, employee morale, labour
strike etc.

Cost concept is found in accounting. Price changes are not considered. Money value is bound to change
often from time to time. This is a strong limitation of accounting.

Acceptable alternatives are so broad based that comparisons are likely to be confusing or misleading. For
instance, inventory cost may be ascertained by LIFO or FIFO; or stock may be evaluated at cost price or
market price.