Chapter 1 - Theoretical Framework : Unit 1 - Meaning and Scope of Accounting - PART 3


  • Relationship of Accounting with other disciplines  :
            a) Accounting and Economics :
            Economics concerns the decision making about use of scare resources to satisfy human wants. This can be viewed from the perspective of  a firm or country on the whole. Accounting provides majority of  information to users for making decisions. Accounting and Economics overlap in m any ways . Accounting helped in the improvisation of management decision making process, while economic theories influenced the development of decision making tools in accounting

            b) Accounting and Statistics :
Accounting information is very precise, and all values are important individually as they relate to business transactions. However, such precision is not required for decision making, hence, statistical approximations are sought, hence, statistical methods are applied in accounting data to get average of relationships. Also, accounting records generally takes short term view of events and are confined to a year, but statistical analysis is useful if longer view is taken. Several accounting ratios, accounting calculations, financial calculations are based on statistical formulas.

            c) Accounting and Mathematics :
Double entry book keeping can be converted into algebraic form. Knowledge of arithmetic and algebra is a pre-requisite for accounting computations and measurements, ex - calculation of interest. With the advent of computer, mathematics is becoming a vital part of accounting. Presently, graphs and charts are being extensively used for communicating accounting information

            d) Accounting and Law :
An entity is created, controlled and operated in a legal environment. Transactions are governed by various acts such as Sale of Goods Act, Companies Act governs companies. Accounting system influences the development of law and hence, both supplement the growth of each other

            e) Accounting and Management :
Management is a very broad area and covers disciplines mentioned above as well. Accountants are placed in key managment roles and the information generated by way of accounting information assists in management decision making. Accounting data is the basic source of information among several other sources. So, accounting system must be moulded to serve management purpose
  • Limitations of Accounting :
            a) The factors relevant for assessing networth of enterprise is not always included since they cannot be recorded in terms of money. Ex -loyalty and skill of personnel is the most valuable asset, still the same is not recorded in books
            b) Users are interested to know the position of the enterprise in future and in long run, but the balance sheet shows the position of the enterprise as on past date. Business dynamics change by the time annual reports reach users. However, to overcome this, auditors disclose changes that effect the origination materially that has taken place up to the date of signing of report by management, as required by accounting standard 
            c) Accounting ignores changes in money such as inflation
            d) In some occasions when accounting principles conflict with each other
            e) Accounting estimates depend on sheer personal judgement of accountant, ex - method of depreciation adopted, and hence, the user's decision making is dependent on accountant's judgement
            f) Financial statements consider only those assets that can be expressed in terms of money, Ex - human resource
            g) There are different accounting policies for treatment of same item which results in higher probability of manipulations


  • Role of Accountants in society:

Accountancy profession has very high esteem in public An accountant with his education, skill, training and capability provides the required services to the society.
1. Areas of service of Accountants :

a) Maintenance of books of accounts        :
      i) Proper and systematic recording of transactions
      ii)That will assist in determining the financial position and financial performance of the        enterprise
      iii)And assist internal and external stakeholders in decision making

b) Statutory Audit
      Enterprises are either required by law ( ex - Companies Act require Companies to get their books audited statutorily, co-operative society) or by way of decision of owner (ex - partner in partnership firm) to get their books audited and obtain a report from the auditor as to whether the financial statements (Balance Sheet and Profit and Loss Account), give a true and fair view

c) Internal Audit
      This is the audit conducted of transactions and systems (ex - cash management system to prevent misappropriation or theft of cash) that ensure adequate safeguards are in place with respect to the transactions and assets of the company. The report is given by the auditor to the management

d) Taxation
      Assist in tax planning resulting in avoidance or reduction of tax, representing the organisation with tax authorities, settlement of tax liabilities

e) Management Accounting and Consultation services
      Collect, analyse, interpret and report on information useful for management for its decision making. Ex - advisory services on working capital management, expenditure control etc

f) Financial Advice
      Providing guidance in planning and managing personal finance in areas such as :
      i) Investments : Explains the significance of documents received by shareholders and assists them in their decision making
      ii) Insurance : Providing information on various policies and assist in choosing appropriate policy
      iii) Business Expansion : In mergers, accountants interpret the accounts and advising clients by informing them the cost and financial consequences of mergers.  They are extremely useful for negotiations and in determining best method of finance
      iv) Investigations : To ascertain if profits have reduced, to decide if it is cheaper to manufacture or buy an article, increase management efficiency, ascertain the occurrence of fraud, value business etc
      v) Pension schemes : Before any provident fund or pension scheme is finalised, an accountants consultation is required

g) Other Services
      Accountants are required in share registration, company formation, liquidation, reporting cost data to management (role of Cost Accountant) etc


2. CA in Industry:
He performs functions such as accounting , costing, estimation and budgeting

3. CA in Public Sector Enterprises:
Example of Public sector enterprises in India as Bharat Sanchar Nigam Limited (BSNL), Bharat Heavy Electricals Limited(BHEL) etc
To prepare and report on the accounts of such public sector enterprises to public to justify the financial position and performance of such organisations  as depicted in Balance Sheet and Profit and Loss account respectively.

4. CA and Economic Growth:

Accountants must encourage the increase of efficiency of the organisations that will, in turn enable the growth of the economy in general and must always keep the best interest of the nation in mind.



_____________End of Unit 1 _____________



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