1.

2 DEVELOPMENT OF ACCOUNTING DISCIPLINE

The history of accounting can be traced back to ancient times. According to
some beliefs, the very art of writing originated in order to record accounting
information. Though this may seem to be an exaggeration, but there is no
denying the fact that accounting has a long history. Accounting records can
be traced back to the ancient civilizations of China, Babylonia, Greece and
Egypt. Accounting was used to keep records regarding the cost of labour and
materials used in building great structures like the Pyramids.
During 1400s, accounting grew further because the needs for information of
merchants in the Venis City of Italy increased. The first known description of
double entry book keeping was first published in
1994 by Lucas Pacioli. He was a mathematician and a friend of Leonardo
Ileda Vinci.
The onset of the industrial revolution necessitated the development of more
sophisticated accounting system, rather than pricing the goods based on
guesses about the costs. The increase in competition and mass production of
goods led to the rise of accounting as a formal branch of study.
With the passage of time, the corporate world grew. In the nineteenth
century, companies came up in many areas of infrastructure like the railways,
steel, communication, etc. It led to a rapid growth in accounting. As the
complexities of business grew, ownership and management of business was
divorced. As such, managers had to come up with well-defined, structured
systems of accounting to report the performance of the business to its owners.
Government also has had a lot to do with more accounting developments.
The Income Tax brought about the concept of 􏰁income􏰀. Government takes
a host of other decisions, relating to education, health, economic planning, for
which it needs accurate and reliable information. As such, the government
demands stringent accountability in the corporate sector, which forces the
accounting process to be as objective and formal as possible.

1.3 AN ACCOUNTANT􏰀S JOB PROFILE: FUNCTIONS OF

ACCOUNTING
A man who is involved in the process of book keeping and accounting is
called an accountant. With the coming up accounting as a specialised field of
knowledge, an accountant has a special place in the structure of an
organisation, because he performs certain vital functions.
The following paragraphs examine the functions of accounting and what role
does an accountant play in discharging these functions.
An accountant is a person who does the basic job of maintaining accounts as
he is the man who is engaged in book keeping. Since the managers would
always want to know the financial performance of the business. An
accountant prepares profit and loss account which reports the profits/losses of
the business during the accounting period, Balance Sheet, which is a
statement of assets and liabilities of the business at a point of time, is also
proposed by all accountants. Since both statements are called financial
statements, the person who prepares them is called a financial accountant.
Accounting information serves many purposes. A part from revealing the
level of performance, it throws light on the causes of weakness and deviation
from plans (in any). In this way an accountant becomes an important
functionary who plays a vital role in the process of management control,
which is a process of diagnosing and solving a problem. Seen from this point
of view, an accountant can be referred to as a management accountant.
Tax planning is an important area as far as the fiscal management of a
company is concerned. An accountant has a suggestive but very specific job
to do in this regard by indicating ways to minimise the tax liability through
his knowledge of concessions and incentives available under the existing
taxation framework of the country.
An accountant can influence a company even by not being an employee. He
can act as a man who verifies and certifies the authenticity of accounts of a
company by auditing the accounts. It is a strictly professional job and is done
by persons who are formally trained and qualified for the purpose. They have
an educational status and a
prescribed code of conduct like the Chartered Accountants in India and
Certified Public Accountants in USA.
Information management is another area which keeps an accountant busy. He
is the one who classifies the financial information into information for
internal use (management accounting function); and information or external
use (financial accounting function). Irrespective of the size and degree of
automation of a business, information management is a key area and many
organisations are known to have perished because they failed to recognise
this as an important function of an accountant because information system is
imperative for effective cost control, to forecast cash needs and to plan for
future growth of the organisation.

1.4 UTILITY OF ACCOUNTING

The preceding section has just brought out the importance of information.
Effective decisions require accurate, reliable and timely information. The
need for quantity and quality of information varies with the importance of the
decision that has to be taken on the basis of that information. The following
paragraphs throw light on the various users of accounting information and
what do they do with that information.
Individuals may use accounting information to manage their routine affairs
like operating and managing their bank accounts, to evaluate the
worthwhileness of a job in an organization, to invest money, to rent a house,
etc.
Business Managers have to set goals, evaluate progress and initiate corrective
action in case of unfavourable deviation from the planned course of action.
Accounting information is required for many such decisions􏰂purchasing
equipment, maintenance of inventory, borrowing and lending, etc.
Investors and creditors are keen to evaluate the profitability and solvency of a
company before they decide to provide money to the organisation. Therefore,
they are interested to obtain financial information about the company in
which they are contemplating an investment. Financial statements are the
principal source of information to them which are published in annual reports
of a company and various financial dailies and periodicals.
Government and Regulatory agencies are charged with the responsibility of
guiding the socio-economic system of a country in such a way that it
promotes common good. For example, the Securities and Exchange Board of
India (SEBI) makes it mandatory for a company to disclose certain financial
information to the investing public. The government􏰀s task of managing the
industrial economy becomes simplify if the accounting information such as
profits, costs, taxes, etc. is presented in a uniform manner without any
manipulation or 􏰁window- dressing􏰀.
Central and State governments levy various taxes. The taxation authorities,
therefore, need to know the income of a company to calculate the amount of
tax that the company would have to pay. The information generated by
accounting helps them in such computations and also to detect any attempts
of tax evasion.
Employees and trade unions use the accounting information to settle various
issues related to wages, bonus, profit sharing, etc. Consumers and general
public are also interested in knowing the amount of income earned by various
business houses. Accounting information helps in finding whether or not a
company is over charging or exploiting the customers, whether or not
companies are showing improved business performance, whether or not the
country is emerging from the economic
recession, etc. All such aspects draw heavily on accounting information and
are closely related to our standard of living.

1.5 TYPES OF ACCOUNTING

The financial literature classifies accounting into two broad categories, viz,
Financial Accounting and Management Accounting. Financial accounting is
primarily concerned with the preparation of financial statements whereas
management accounting covers areas such as interpretation of financial
statements, cost accounting, etc. Both these types of accounting are examined
in the following paragraphs.

1.5.1Financial accounting
As mentioned earlier, financial accounting deals with the preparation of
financial statements for the basic purpose of providing information to various
interested groups like creditors, banks, shareholders, financial institutions,
government, consumers, etc. Financial statements, i.e. the income statement
and the balance sheet indicate the way in which the activities of the business
have been conducted during a given period of time.
Financial accounting is charged with the primary responsibility of external
reporting. The users of information generated by financial accounting, like
bankers, financial institutions, regulatory authorities, government, investors,
etc. want the accounting information to be consistent so as to facilitate
comparison. Therefore, financial accounting is based on certain concepts and
conventions which include separate business entity, going concern concept,
money measurement concept, cost concept, dual aspect concept, accounting
period concept, matching concept, realization concept and conventions of
conservatism, disclosure, consistency, etc. All such concepts and conventions
would be dealt with detail in subsequent lessons.
The significance of financial accounting lies in the fact that it aids the
management in directing and controlling the activities of the firm and to
frame relevant managerial policies related to areas like production, sales,
financing, etc. However, it suffers from certain drawbacks which are
discussed in the following paragraphs.
·  The information provided by financial accounting is consolidated in
nature. It does not indicate a break-up for different departments, processes,
products and jobs. As such, it becomes difficult to evaluate the performance
of different sub-units of the organisation.
·  Financial accounting does not help in knowing the cost behaviour as
it does not distinguish between fixed and variable costs.
·  The information provided by financial accounting is historical in
nature and as such the predictability of such information is limited. The
management of a company has to solve certain ticklish questions like
expansion of business, making or buying a component, adding or deleting a
product line, deciding on alternative methods of production, etc. The
financial accounting information is of little help in answering these questions.
The limitations of financial accounting, however, should not lead one to
believe that it is of no use. It is the basic foundation on which other branches
and tools of accounting analysis are based. It is the source of information,
which can be further analysed and interpreted according to the tailor-made
requirements of decision-makers. 1.5.2Management accounting
Management accounting is 􏰁tailor-made􏰀 accounting. It facilitates the
management by providing accounting information in such a way so
that it is conducive for policy making and running the day-to-day operations
of the business. Its basic purpose is to communicate the facts according to the
specific needs of decision-makers by presenting the information in a
systematic and meaningful manner. Management accounting, therefore,
specifically helps in planning and control. It helps in setting standards and in
case of variances between planned and actual performances, it helps in
deciding the corrective action.
An important characteristic of management accounting is that it is forward
looking. Its basic focus is one future activity to be performed and not what
has already happened in the past.
Since management accounting caters to the specific decision needs, it does
not rest upon any well-defined and set principles. The reports generated by a
management accountant can be of any duration􏰃 short or long, depending on
purpose. Further, the reports can be prepared for the organisation as a whole
as well as its segments.

1.5.3Cost accounting
One important variant of management accounting is the cost analysis. Cost
accounting makes elaborate cost records regarding various products,
operations and functions. It is the process of determining and accumulating
the cost of a particular product or activity. Any product, function, job or
process for which costs are determined and accumulated, are called cost
centres.
The basic purpose of cost accounting is to provide a detailed break- up of
cost of different departments, processes, jobs, products, sales territories, etc.,
so that effective cost control can be exercised.
Cost accounting also helps in making revenue decisions such as those related
to pricing, product-mix, profit-volume decisions, expansion of business,
replacement decisions, etc.
The objectives of cost accounting, therefore, can be summarized in the form
of three important statements, viz, to determine costs, to facilitate planning
and control of business activities and to supply information for short- and
long-term decision. Cost accounting has certain distinct advantages over
financial accounting. Some of them have been discussed succeedingly. The
cost accounting system provides data about profitable and non-profitable
products and activities, thus prompting corrective measures. It is easier to
segregate and analyse individual cost items and to minimize losses and
wastages arising from the manufacturing process. Production methods can be
varied so as to minimize costs and increase profits. Cost accounting helps in
making realistic pricing decisions in times of low demand, competitive
conditions, technology changes, etc.
Various alternative courses of action can be properly evaluated with the help
of data generated by cost accounting. It would not be an exaggeration if it is
said that a cost accounting system ensures maximum utilization of physical
and human resources. It checks frauds and manipulations and directs the
employer and employees towards achieving the organisational goal.

1.5.4Distinction between financial and management accounting

Financial and management accounting can be distinguished on a variety of
basis like, users of information, criterion for decision making, behavioural
implications, time frame, type of reports.
Table 1 presents a summary of distinctions between financial and
management accounting.