The main objective of accounting is to deliver useful information to the interested users, including external and internal. In the case of external users, the necessary information is provided in the form of financial statements like profit and loss accounts and balance sheets. Figure below lists the points that elaborate on the nature of accounting:
Table of Contents
- 1 Nature of Accounting
- 2 Scope of Accounting
Nature of Accounting
Let us now discuss the nature of accounting in detail:
- Accounting as an art
- Accounting as a science
- Accounting as an ideology
- Accounting as a language
- Accounting as a historical record
- Accounting as a commodity
- Accounting as an economic reality
- Accounting as an information system
Accounting as an art
The word ‘art’ refers to the way of performing- ing something. Accounting is the art of recording, classifying and summarising financial data. Accounting is a systematic method that consists of definite techniques and their appropriate application, which requires applied skills and expertise. Thus, by nature, accounting can be considered as an art.
Accounting as a science
‘Science’ is all about obtaining knowledge about a systematic pattern through observation and investigation. Similarly, accounting is the science of recording and pre- sending the financial data of an economic entity by observing and investigating the economic events through established methods.
Accounting as an ideology
Ideology refers to a system of ideas and views regarding certain concepts or practices carried out in the world. Different ideologies form the basis of different economic or political theories and policies. Accounting is also considered as an ideology because it is considered as a means of justifying the current social, economic and political arrangements.
Accounting as a language
Accounting is also called the language of business because the activities of an organisation are reported in the form of financial reports and statements using accounting language. Accounting defines a certain set of procedures that are used to create financial data for a business.
Accounting as a historical record
Historical accounting records of an organisation help in getting information on past transactions of a business as well as profits earned and losses made.
Accounting as a commodity
Accounting information is viewed as a commodity. It is so because there is demand for such accounting information in the financial markets. For example, share market investors study the financial and accounting reports of companies before buying their shares.
Accounting as an economic reality
Accounting is also considered to be a means of demonstrating the current financial position of an organisation. Accounting professionals must try to mirror the current economic reality in the financial statements of an organisation.
Accounting as an information system
The main components of an information system are information source (input), processing, communication channel, output and receiver. In accounting, the input data is collected from different business activities and later processed to make it more meaningful. The resultant output (interpretation of data) is communicated to various users such as the government, suppliers, researchers, investors, managers, creditors, etc. through various channels such as electronic and print media.
Scope of Accounting
The scope of accounting has been widening with the changes in the economy and societal demands. It extends to business, trade, government, financial institutions, individuals and families and various other avenues. The following points explain the scope of accounting in different areas:
Accounting is widely applicable in the business sector. It is rightly called ‘Language of Business’. The main objective of every business is to earn profits. Financial transactions of a business concern are recorded in the books of accounts to ascertain operating results and determine the financial position.
Accounting also has scope in non-profit organisations. These organisations record their transactions such as the donations received, subscription given by members and all the expenditures. To do so, statements such as receipt and payment account, income and expenditure account and balance sheet are prepared as per the rule of accounting.
The scope of accounting also exists in central and state-owned organisations. These organisations use the system of accounting for various purposes such as determining the income, calculating expenditure and proper running of the administration. Apart from that, interpretation and evaluation of accounting data is required for performing national planning, pre- paring financial budget, determining national progress or regress and so on.
Professionals like engineers, doctors, lawyers and sportspeople also maintain their accounts to keep a tab on their income and expenditure and determine their income tax liability.
Individuals also perform financial transactions to earn their livelihood. They also do some form of accounting to obtain financial information; thereby making personal economic decisions.