177427198-Eco - Capter 1 INTRODUCTION A business is an...

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Capter 1 INTRODUCTION A business is an activity carried out with the intention of earning the profits. A person carrying out the business is interested in knowing basically two facts about his business – (a) What is the result of operations of the business activity? Whether the business has resulted into the profit or loss? Excess of revenue over the expenses will be in the form of profits Whereas excess of expenditure over the revenue will be in the form of loss. (b) Where the business stands in financial terms at any given point of time. the transactions relating to the business are recorded in a systematic manner. According to American Institute of Certified Public Accountants, “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are of a financial character and interpreting the results thereof.” The process of recording the business transactions in a defined set of records, Which in technical words are called as Books of Accounts, is referred to as Book Keeping. Accounting refers to the process of analyzing and interpreting the information already recorded in the books of accounts with the ultimate intention of answering the above stated questions. This intention is satisfied by preparing what are called as Financial Statements. The financial statements prepared by the organization are basically in two forms- (a) Profitability Statement, which is the answer to the first question i. e, what is the result of operations of the business activity. Thus, profitability statement indicates the amount of profit earned or the amount of loss incurred. (b) Balance Sheet, which is the answer to the second question i.e. where the business stands in financial terms at any given point of time. Thus, balance sheet indicates the financial status of the business at any given point time in terms of its assets and liabilities. 2 Management Accounting The nature of these financial statements is discussed in details in the following pages. Thus, the process of book keeping is more procedural and clerical in nature while the process of accounting is more managerial in nature. As such, the job of book keeping is entrusted to junior level employees, whereas the job of accounting needs more professional expertise. STREAMS OF ACCOUNTING The process of Accounting gets split into three streams - 1. Financial Accounting 2. Cost Accounting 3. Management Accounting Let us discuss the nature of these three streams of accounting in details. Financial Accounting Financial Accounting is the process .of systematic recording of the business transactions in the various books of accounts maintained by the organization with the ultimate intention of preparing the financial statements there from. These financial statements are basically in two forms. One, Profitability Statement which indicates the result of operations carried out by the organization during a given period of time and second Balance Sheet which indicates the state of affairs of the organization at any given point of time in terms of its assets and liabilities.
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