Accounting: Meaning, Difference Between Book-Keeping and Accounting, and Objectives

Q. Define Accounting. How is it different from Book-Keeping? Explain the objectives of Accounting. 

Ans. Definition of accounting: According to American Institute of Certified Public Accountants (A.I.C.P.A.), “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 atleast, of a financial character, and interpreting the results thereof.”

Distinction between Book-Keeping and Accounting: 

Book-Keeping differs from Accounting in the following respects :

Sr. No.	Basis	Book-Keeping	Accounting
1.	Scope	Book-Keeping includes : (a) Identifying the transactions of financial nature; (b) Measuring the identified transactions in terms of money; (c) Recording the measured transactions, and (d) Classifying them into ledger.	Accounting in addition to book-keeping includes: (i) Summarizing the classified transactions; (ii) Analysing and interpreting the summarised results; and (iii) Communicating the results to parties interested in them.
2.	Stage	Book-Keeping is primary stage.	It is the secondary stage. Accounting starts where Book-Keeping ends.
3.	Objective	The main objective is of Book-Keeping is to maintain systematic records of transactions of financial nature.	Its main objective is to ascertain the net results and financial position of the business and to communicate them to interested parties.
4.	Nature of Job	The Book-keeping function is routine and clarical in nature.	The Accounting function is analytical in nature.
5.	Who Performs	The Book-Keeping function is performed by junior staff.	The Accounting function is performed by senior staff.
6.	Knowledge Level	It can be performed by person having limited level of knowledge.	It is performed by persons having higher level of knowledge than that of Book-keeper.
7.	Analytical Skill	The Book-keeper is not required to possess analytical skill.	The Accountant is required to possess analytical skill.
8.	Personal Judgement	In all enterprises transactions are recorded according to the principles of accountancy and personal judgement of the book-keeper is not required.	Methods of analysing, interpretation and reporting may differ in various enterprises. Hence, personal judgment of the accountant is essential.
9.	Supervision and Checking	Book-keeper cannot supervise and check the work of an accountant.	Accountant supervises and checks the work of a book-keeper.
10.	Information for Managerial Decisions	It does not provide any information for taking manerial decisions.	It provides information for taking managerial decisions.

Objectives of Accounting: The following are the main objectives of accounting :—

(1) Maintenence of systematic record of business transactions: The main objective of accounting is to maintain complete record of business transactions according to specified rules. Complete record of business transactions helps to avoid the possibility of ommission and fraud. For this purpose, all the business transactions are first of all recorded in Journal and Subsidiary books and then posted into ledger.

(2) Calculation of profit or loss: The second main objective of accounting is to ascertain the net profit earned or loss suffered on account of business transactions during a particular period. For this purpose Trading and Profit & Loss Account of the business is prepared at the end of each accounting period. All the items relating to purchases, sales, expenses and revenues (incomes) of the business are recorded in Trading and Profit &Loss Account. If the amount of revenue exceeds the expenditure incurred in earning that revenue, there is said to be profit. In case the expenditure exceeds the revenue, there is said to be loss. In addition, a businessman is able to get the following information by preparing a trading and profit & loss account:—

I. How much goods have been purchased during a particular period?

II. How much goods have been sold during a particular period.

III. How much goods have remained unsold and what is its value.

IV. How much amount has been spent on various heads of expenditure and how much amount has been earned by various heads of revenues. 

By attaining these informations a businessman can keep effective control on expenditure.

(3) Depiction of financial position of the business: For a businessman, merely ascertaining profit or loss of the business is not sufficient. The businessman must also know the financial health of the business. For this purpose, after preparing the Profit & Loss Account, a statement called ‘Balance Sheet’ is prepared which shows the assets and their values on the one hand and the liabilities and capital on the other hand. A Balance Sheet is actually a screen picture of the financial position of the business. At one glance, one would know the following by looking at the Balance Sheet :—

I. How much the business has to recover from debtors.

II. How much the business has to pay to creditors.

III. How much the business has in the form of (a) Cash in hand (b) Cash at Bank (c) Closing Stock, and (d) Fixed Assets.

(4) To portray the liquidity position: Another objective of accounting is to provide information about how an enterprise obtains and spends cash. For this purpose it prepares a cash flow statement depicting inflows and outflows of cash from operating, investing and financing activities. 

(5) To file Tax returns: One of the main objectives of accounting is to provide bases for filing tax returns relating to income tax, sales tax, value added tax, service tax, excise duty, etc.

(6) Communicating accounting information to various users: Another main objective of accounting is to communicate the accounting information to various interested parties like owners, investors, creditors, banks, employees and government authorities etc. The information helps them in taking sound and judicious decisions about the business entity.