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Nature and Purpose of Accounting - Financial Accounting Concepts

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Accounting Standard Council (ASC): "Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature about economic entities that is intended to be useful in making economic decision."

American Institute of Certified Public Accountants (AICPA): "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 at least of financial character and interpreting the results thereof."

American Accounting Association (AAA): "The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information."


The basic purpose of accounting is to provide quantitative information about a business, that is useful to statement users particularly owners and creditors, in making economic decisions. It focuses on the process of preparing different financial reports that will show the information regarding the performance of the company or organization to the external parties or stakeholders that are involved with the company or organization such as investors, creditors, tax authorities etc.


Financial Accounting

Financial accounting is a branch of accounting concerned with classifying, measuring, and recording the economic transactions of an entity in accordance with established principles, legal requirements and accounting standards. It is primarily concerned with communicating a true and fair view of the financial performance and financial position of an entity to external parties.

Management Accounting

Management accounting is a branch of accounting concerned with collecting, analyzing and interpreting quantitative and financial information. It is primarily concerned with communicating information to management for planning, controlling and decision making.


Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

The purpose of audit is to verify that the subject of the audit was complete or operates according to approved and accepted standards, statutes, regulations, or practices. It also evaluates controls to determine if the conformance will continue. Auditing is a part of some quality control certifications such as ISO 9000.

Cost Accounting

Cost accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In the widest usage, it embraces the preparation of statistical data, application of cost control methods and the ascertainment of profitability of activities carried out or planned.

Financial Management

Financial management is that managerial activity which is concerned with the planning and controlling of the firm's financial resources. It is the effective & efficient utilization of financial resources. It means creating balance among financial planning, procurement of funds, profit administration & sources of funds.

Government Accounting

Government Accounting, also known as Fund Accounting is the main accounting system used by non-profit organizations and the government sector for recording and monitoring of money and assets that were entrusted, awarded, appropriated, or contributed to their coffers. Said funds or assets were conveyed in order to provide the non-profit entity the means to carry out a specific purpose or mission for which the institution was created or established.

The objective is to present accurate financial reports on how the money was spent, to show they were disbursed in accordance with the program's budget, and within the provisions prescribed as conditions to the fund granting.

In the absence of any restrictions or provisions for fund use, the entity should still present a financial report on how wisely the money was spent in accordance with the Financial Reporting Standards Council (FRSC) fund accounting guidelines for unrestricted donations. Hence the system provides that each account should be accounted for separately.


Bookkeeping involves the systematic recording of the financial transactions and the maintenance of the correct & up-to-date financial records of the organization by an accountant clerk. Organization can be a business firm, charitable institute or even an association of sports. Effective management of the Bookkeeping makes the business owners acutely aware of the losses and the profits. To be precise, bookkeeping brings the result of the economic activities to the surface.

The two methods of Bookkeeping are: Single entry bookkeeping system and double entry bookkeeping system. Single entry bookkeeping denotes that all the transactions are to be entered only once in the account system. It keeps the record as regard with the flow of the income & expenses. This system is quite useful for the persons who have just commenced on the region of a business.

Double entry bookkeeping implies that all the transactions are to be entered twice in the account system. It includes all the information regarding the cash on hand, equity in building, equipments, loans, mortgages, profit & loss sheet and cross-checking of all the entries. This system gives the complete picture of a business as it reflects on all the initial investments unlike in the method of a single entry.

Tax Accounting

Tax Accounting includes the preparation of tax returns and the consideration of the tax consequences of proposed business transactions. It is the accounting method that focuses on taxes rather than the appearance of public financial statements. Tax accounting is governed by the National Internal Revenue Code which dictates the specific rules that companies and individuals must follow when preparing their tax returns. Tax principles often differ from



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