Methodology of Business Studies - Section 3, Part 4

Part – IV ACCOUNTING
Accounting:  Accounting is a discipline which records, classifies, summarizes and interprets financial information about the activities of a concern so that intelligent decisions can be made about the concern.   According to the committee  on Terminology of the American Institute of Certified Public Accounts (AICPA), ‘ Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character, and interpreting the result there of .
Book Keeping and Accounting:  Book keeping is the art and science of keeping a systematic record of business transactions in a set of books.  But accounting is more concerned with summarization of the same for decision making.  The major differences between them are
Book keeping is concerned with preliminary steps in accounting process viz. recording of business transactions, so it is used in a narrow sense.  Whereas Accounting is used in a wider sense covering grouping, summarization, analysis, interpretation   etc...
The scope of work in book keeping is clerical and routine in nature but scope of work of accounting is analytical in nature.
The results of records prepared in boo-keeping are for internal use. But the results of records prepared in accounting are communicated to both internal and external users.
Branches of Accounting:  There are mainly 3 branches of accounting according to contents of information and usefulness.
Financial accounting – It deals with recording of financial transactions to enable the business to prepare final accounts. The main object of it is to find out the profitability and to provide information about the financial position of the concern.
Cost accounting – It is concerned with finding out the cost of goods produced or services rendered by a business. It is the process of accounting for costs. It helps in cost-control decision making.
Management accounting- It is related to that aspect of accounting information, which is useful to the management for taking various decisions. Thus management accounting consists of cost accounting, budgetary control, inventory control, internal auditing, reporting etc.  In short it is the accounting for management.
The Accounting Process:  The process of accounting that leads to the measurement of financial performance and position of an enterprise consists of the following stages:

• Documentations

• Recording of transactions chronologically in journal.

• Classification of transactions according to nature and posting them in to respective ledgers.

• Summarizing the transactions with the help of trail balance

• Bifurcating transactions and preparing P&L account and balance sheet.

• Analyzing the statements and interpreting the data.

Role of accounting in the development process:  Accounting should play a positive and effective role in the areas like:

• Formulation of economic policies

• Anticipating  changes and preparing for the same

• Giving early warning of sickness

• Helping in evolving a proper system of financial and Information technology

• Providing evidence in the court of law

• Ascertaining financial conditions of enterprise and so on

Accounting Standards
Accounting is the language of business. To make the language convey the same meaning to all people, accountants all over the world have developed certain rules, procedures and conventions which represent a consensus view by the profession of good accounting practices and procedures.  The uniformity in accounting practice enable comparison of financial reports of different companies.  Accounting standards are the methods and procedures used in accounting for events reported in financial statements.  The object of accounting standards is to provide uniformity in financial reporting and to ensure consistency and comparability of information.
To maintain uniformity in accounting principles throughout the world, International Accounting Standards Committee (IASC) came in to being on 29th June 1973  consisting of accounting bodies from  9 nations with its headquarters at London.  The committee has laid down standards regarding various accounting matters. In tune with the same Institute of Chartered Accountants of India established an Accounting Standards Board (ASB) in April 1977.  ASB prepared several accounting standards in tune with International Accounting Standards.
Some important Accounting Standards are
Accounting Standard 1–     Disclosure of accounting policies
Accounting Standard 2-    Valuation of inventory
Accounting Standard 3-    Cash flow statements
Accounting Standard 6-     Depreciation Accounting
Accounting Standard 8-    Accounting for Research and Development
Accounting Standard 10-    Accounting for fixed Assets etc...
Major factors of production and their rewards:  The various resources that go into the production process for goods or services are called the factors of production or inputs.  The major factors of productions are land, labor, capital and entrepreneurship.
Land- Land refers to the various natural resources like land surface, mines, forests, rivers and the sea.  Land represents the gift of nature to own production process.  Normally rent is regarded as the reward for land.
Labour - : Labour represents all kinds of physical and mental efforts of a man undertaken to earn an income.  Wages or Salaries is the reward for labour.
Capital – Capital represents a stock of existing wealth that is used to produce further wealth.  Interest is regarded as the reward for capital.
Profit – Profit is regarded as the reward for entrepreneurship.


Factors to be considered for starting a business

• Select a proper line of business based on its capacity to generate good return at minimum risk

• Select a proper location for the business by considering various factors like availability of raw-materials, availability of labor, transportations and banking facilities, power, water etc.

• Decide about the form of organisation structure – i.e., sole proprietorship, partnership, corporate form etc.

• Estimate the fund requirements and find various sources of finance.

• Decide on the structures and constructions

• Decide on labour requirements, sources and rewards

• Fulfillment of legal requirements and procedural formalities

• Launching of the enterprise

Taxation :  Taxation is an effective tool to influence the level of savings and investment in the country.  Through taxes, the government regulates the business sector.  Taxes are imposed in many ways.  There are direct taxes and indirect taxes.
Direct taxes include taxes on income and property and indirect taxes covers taxes on commodities and services. Important direct taxes are income tax, corporate tax and wealth tax.  Important indirect taxes are sales tax, excise duties and input duties.
Major sources of tax revenues for central government

• Tax on income other than agricultural income

• Customs duty and exports duties

• Corporation tax

• Estate duty in respect of succession to properly other than agricultural land

• Taxes on sale or purchase of newspapers and on advertisements published there is etc.

Major Sources of tax revenue for State Government

• Taxes on agricultural income

• Land revenue

• Taxes on land and building

• Taxes on electricity

• Taxes on vehicle for use on roads etc...