Here is the detailed explanation of Book-keeping, Accounting & Accountancy:
Book-keeping:
The word book-keeping is composed of two words: book and keeping. Book refers to book of accounts where transactions are recorded. Keeping means the act of recording the transactions in the books.
• Bookkeeping is the systematic recording of day-to-day financial transactions of an organization such as sales, purchases, expenses, and receipts, in a chronological order.
• Bookkeeping is the first stage of accounting.
Note: Bookkeeping includes recording the transactions in journal, posting them into ledger and preparation of trial balance to check the arithmetical accuracy of recording. When this process ends, accounting starts.
Accounting:
Accounting is the process of identifying, measuring, recording, classifying, summarizing, analyzing, interpreting and communicating financial information.
In other words, Accounting is the process of recording the financial transactions and preparing financial statements and communicating them to the users.
• It goes beyond the basic record-keeping of bookkeeping to provide a more clear understanding of the financial health and performance of an organization.
Therefore, it is also known as “Language of Business” since it communicates the financial information about the business to the users.
• Accounting begins when bookkeeping ends.
Accountancy:
Accountancy is a profession or subject and is broader than accounting, that consist of bookkeeping, accounting, and auditing.
• It involves the entire process of managing financial information, from recording transactions (bookkeeping) to interpreting and communicating financial results (accounting).
Nature of Accounting:
The nature of accounting has been discussed below:
‣ Accounting as a service activity:
Accounting, at its core, is a service activity that provides a systematic and organized way of recording, analyzing, and reporting financial transactions for individuals, businesses, and organizations. It serves as a service to meet the informational needs of various stakeholders, helping them make informed decisions based on accurate and relevant financial data.
‣ Accounting as a profession:
Accounting is considered a profession that requires specialized knowledge, skills, and ethical standards. Professional accountants are trained and educated to apply accounting principles, standards, and techniques. The accounting profession contributes to the integrity and reliability of financial information.
‣ Accounting as a social force:
In early days, accounting was limited to serving the interest of the owners or investors. With the change in business environment, accounting is responsible to protect the interests of the wider society which is directly or indirectly linked with the operation of the business.
‣ Accounting as a language:
Accounting is often referred to as the language of business. It involves a standardized system of communicating financial information. Through financial statements and reports, accounting conveys the economic activities and financial position of an entity to various stakeholders, allowing them to understand and interpret the entity’s financial health.
‣ Accounting as a science and art:
Accounting is both a science and an art. As a science, it follows systematic principles, rules, and standards that provide a structured framework for recording and analyzing financial transactions.
As an art, accounting requires interpretation, judgment, and creativity in areas such as financial reporting, analysis, and decision-making.
Qualitative Features of Accounting Information:
Qualitative features of accounting information refer to the characteristics that enhance the quality and usefulness of financial reports for decision-making purposes. These features are essential for ensuring that financial information is relevant, reliable, and understandable.
The qualitative features of accounting information include:
Relevance:
Accounting information should be relevant to the users. Information is relevant when it is capable of influencing the decisions of the users. It helps users make informed decisions about the present and future.
Relevant informations should have the following values:
- Predictive value: Predictive value refers to the ability of information to help users make predictions or forecasts about future events.
- Feedback value: Feedback value is the ability of information to provide feedback on past decisions and outcomes.
- Timeliness: Timeliness emphasizes the importance of providing information in a timely manner. Relevant information loses its value if it is not available when needed.
Reliability:
Reliability ensures that the information presented is trustworthy, verifiable, and free from material errors. Users can depend on the accuracy of the information for decision-making.
It has three basic charactersitics:
- Verifiability: Accounting information is verifiable when it is free from error.
- Representational faithfulness: Representational faithfulness refers to the degree to which the financial information faithfully represents the economic transactions and events it purports to represent.
- Neutrality: Neutrality is the characteristic that requires financial information to be free from bias, ensuring that it is not influenced by any subjective interests or preferences.
Comparability:
Comparability allows users to identify similarities and differences in financial information over different periods or between different entities. Compliance with national and international accounting standards helps to enhance comparability.
Consistency:
Consistency means the use of the same accounting methods and principles from one period to another. A consistent application of accounting policies helps in making meaningful comparisons over time, providing users with a reliable basis for decision-making.
Understandability:
Financial information should be presented in a clear and understandable manner. Complex financial reports may hinder users from comprehending the information. Understandability ensures that financial statements are user-friendly and accessible to a wide range of stakeholders.
Materiality:
Materiality refers to the significance of an item or event in influencing the decisions of users. Material information is relevant enough to make a difference in decision-making. Accounting professionals use materiality as a threshold for determining what information should be included in financial reports.
Prudence (Conservatism):
Prudence encourages a conservative approach in the face of uncertainties. Accountants may choose accounting methods that result in a more conservative estimation of assets and income. This helps prevent the overstatement of financial position and fosters a cautious approach in financial reporting.
Completeness:
Completeness ensures that financial reports contain all necessary information to avoid misleading users. Omissions or incomplete disclosure may lead to a lack of transparency and hinder users’ ability to fully understand the financial position and performance of the entity.
