Definition and Scope of Accounting
Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions and events in a systematic manner.
- Simple Meaning: It is the language of business. It helps us understand the financial health and performance of a company.
- Analogy: Accounting is like a scorecard for a business. It shows whether the business is winning (making a profit) or losing, and what its financial position is.
Scope of Accounting
Accounting is a wide field with several branches:
- Financial Accounting: This is the primary branch. Its main purpose is to prepare financial statements (like the Profit & Loss Account and Balance Sheet) for external users like investors, creditors, and the government.
- Cost Accounting: This branch focuses on calculating the cost of producing goods or services. It helps in controlling costs and setting selling prices.
- Management Accounting: This branch provides financial information to the internal management of a company to help them in planning, decision-making, and controlling business operations.
What are Accounting Standards?
Accounting Standards are a set of written rules and guidelines that companies must follow when preparing and presenting their financial statements.
- Purpose: To bring uniformity, consistency, and comparability to financial reporting.
- Simple Analogy: Think of Accounting Standards as the “grammar rules” for the language of business. Just as grammar rules ensure that everyone writes and understands a language in the same way, accounting standards ensure that all companies prepare their financial statements in a consistent manner. This allows you to compare the financial performance of two different companies, like Infosys and TCS.
Accounting Standards in India
In India, we have two sets of accounting standards that are currently in use.
1. Accounting Standards (AS)
- What they are: These are the traditional accounting standards issued by the Institute of Chartered Accountants of India (ICAI).
- Applicability: They are now applicable mostly to smaller, unlisted companies.
2. Indian Accounting Standards (Ind AS)
- What they are: These are the new set of accounting standards that are converged with the International Financial Reporting Standards (IFRS).
- Purpose: To make Indian financial statements comparable with global standards, which helps in attracting foreign investment.
- Applicability: Ind AS is mandatory for all listed companies and other large, unlisted companies that meet certain net worth criteria. Banks are required to follow Ind AS.
Key Differences: AS vs. Ind AS
| Feature | Accounting Standards (AS) | Indian Accounting Standards (Ind AS) |
| Based on | Traditional Indian accounting principles. | IFRS (International Financial Reporting Standards). |
| Concept | Rule-based. | Principle-based. (Focuses more on the spirit of the standard). |
| Valuation | Primarily based on historical cost. | Uses the concept of “Fair Value” more extensively. (Fair value is the market value of an asset). |
| Comparability | Comparable within India. | Comparable globally. |
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Summary
Accounting is the systematic process of recording and interpreting financial transactions. Its rules are defined by Accounting Standards, which ensure that financial statements are consistent and comparable. India has two sets of standards: the older Accounting Standards (AS) and the newer Indian Accounting Standards (Ind AS). Ind AS is converged with the global IFRS standards, is principle-based, and uses the concept of Fair Value. It is mandatory for all listed companies and banks, making their financial statements understandable and comparable for international investors.
Quick Revision Points
- Accounting: The language of business.
- Accounting Standards: The rules or grammar of accounting.
- Purpose of Standards: To ensure Uniformity and Comparability.
- Two Sets in India: AS (older) and Ind AS (newer).
- Ind AS is based on: IFRS (the global standard).
- Key Difference: AS is rule-based and uses historical cost, while Ind AS is principle-based and uses Fair Value.
- Applicability for Banks: Ind AS is applicable to banks.