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Accounting

&

Financial Analysis 

Definition, Nature, and scope of 

accounting

By

Anand Prakash

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Definition 

“Accounting is the art of recording,

classifying and summarizing in a

significant manner, and in terms of moneytransaction and event which are, in part at

least, of a financial character, and

interpreting the result thereof.” 

{Given by AICPA,in1941}

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Definition

“Accounting is a process of identifying,

measuring and communicating economic

information to permit informed judgmentand decision by users of information.” 

{Given by AAA, in 1966} 

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Definition

“Accounting is a service activity. Its

function is to provide quantitative

information, primarily financial in nature,and about economic activities, that is

intended to be useful in making economic

decision.” {Given by AICPA, IN 1970}

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Data 

Accounting

Recording of Data

Processing of Data

Communication

Business activity andtransaction

Decision making

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Function of Accounting

According to Moonitz, the functions of accounting are:

To manage the resources held by specific entities;

To reflect the claims against the interest in those entities; To measure the changes in those resources, claims and

interested;

To assign the changes to specifiable period of time;

To express the above in term of money as a commondenominator.

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Characteristic of Accounting 

Accounting involves recording of economic activities

which accompany the complexity and uncertainty of 

 business. Therefore, while preparing timely accounting

statements, estimates and professional judgment must be

made.

Accounting statements are prepared on:-

Cash basis of accounting

Accrual basis of accounting

Accounting is historical in nature.

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Objectives of Accounting

Changes in financial position resulting from the income-

 producing efforts of an enterprise;

Earning of an enterprise, presented in a manner that

emphasizes sources and trend of earning;

Economic resources and obligation of an enterprise;

Changes in net financial resources which result from the

financial and investment of an enterprise;

Any additional information, in the form of disclosures,

which is relevant to statement users in assessing a

 particular enterprise’s prospect. 

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Advantages of Accounting

It provides information useful for making economic

decisions.

It serves primarily those users who have limited

authority, ability or resources to obtain information and

who rely on financial statements as their principal

sources of information about an enterprise’s economic

activity.

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Advantages of Accounting

cont… 

It provide information useful to inventors and creditors

for predicting, comparing and evaluating potential cash

flows in term of amount, timing and related uncertainty.

It supplies information useful in judging the manager’s

ability to utilize enterprise resources effectively in

achieving primary enterprise goals.

It provides factual and interpretative information about

transactions and other events which useful for providing,

comparing and evaluating the enterprise’s earning power. 

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Limitation of Accounting

Accounting is historic in nature, it dose not reflect the

current financial position or worth of a business.

The profit and loss account tends to match current

revenue with historical cost rather than current cost.

Accounting statements do not do not show the impact of 

inflation.

Accounting principle are not static or unchanging-

alternative accounting procedures are often equally

acceptable. Therefore, accounting statement do not

always present comparable data.

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Scope of Accounting

Financial Accounting 

Cost Accounting 

Management Accounting 

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 Accounting

Financial Managerial

External reporting Interested party

Incomestatement

Balance sheetCash flow statement

Shareholder 

Investor 

Creditors

Govt. authority

Managers

Employees

Stock Exchange

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Thanks .