Financial Accounting for Managers
Module—I Accounting Fundamentals
Introduction
Accounting is as old as money itself. It has evolved, as have medicine, law and most other fields of human activity in response to the social and economic needs of society. People in all civilizations have maintained various types of records of business activities. The oldest known are clay tablet records of the payment of wages in Babylonia around 600 B.C. Accounting was practiced in India twenty-four centuries ago as is clear from Kautilya’s book `Arthshastra’ which clearly indicates the existence and need of proper accounting and audit.
For the most part, early accounting dealt only with limited aspects of the financial operations of private or governmental enterprises. Complete accounting system for an enterprise which came to be called as “Double Entry System” was developed in Italy in the 15th century. The first known description of the system was published there in 1494 by a Franciscan monk by the name Luca Pacioli.

The expanded business operations initiated by the Industrial Revolution required increasingly large amounts of money which in turn resulted in the development of the corporation form of organisations. As corporations became larger, an increasing number of individuals and institutions looked to accountants to provide economic information about these enterprises. For e.g. prospective investors and creditors sought information about a corporation’s financial status. Government agencies required financial information for purposes of taxation and regulation. Thus accounting began to expand its function of meeting the needs of relatively few owners to a public role of meeting the needs of a variety of interested parties.

1.1.3.2 BOOK KEEPING AND ACCOUNTING

Book-keeping is that branch of knowledge which tells us how to keep a record of business transactions. It is considered as an art of recording systematically the various types of transactions that occur in a business concern in the books of accounts. According to Spicer and Pegler, “book-keeping is the art of recording all money transactions, so that the financial position of an undertaking and its relationship to both its proprietors and to outside persons can be readily ascertained”.

Accounting is a term which refers to a systematic study of the principles and methods of keeping accounts. Accountancy and book-keeping are related terms; the former relates to the theoretical study and the latter refers to the practical work.

1.1.3.3 DEFINITION OF ACCOUNTING

Before attempting to define accounting, it may be made clear that there is no unanimity among accountants as to its precise definition. Anyhow let us examine three popular definitions on the subject:
Accounting has been defined by the American Accounting Association Committee as: “. . . the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information”. This may be considered as a good definition because of its focus on accounting as an aid to decision making.

The American Institute of Certified and Public Accountants Committee on Terminology defined accounting as: “Accounting is the art of recording classifying and summarising, in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof”. Of all definitions available, this is the most acceptable one because it encompasses all the functions which the modern accounting system performs.

Another popular definition on accounting was given by American Accounting Principles Board in 1970, which defined it as: “Accounting is a service society. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is useful in making economic decision, in making reasoned choices among alternative courses of action”. This is a very relevant definition in a present context of business units facing the situation of selecting the best among the various alternatives available. The special feature of this definition is that it has designated accounting as a service activity.
Accounting as a language of business
Accounting is aptly called the language of business. This designation is applied to accounting because it is the method of communicating business information. The basic function of any language is to serve as a means of communication. Accounting duly serves this function. The task of learning accounting is essentially the same as the task of learning a new language. But the acceleration of change in business organization has contributed to increasing the complexities in this language. Like other languages, it is undergoing continuous change in an attempt to discover better means of communications. To enable the accounting language to convey the same meaning to all people as far as practicable it should be made standard. To make it a standard language certain accounting principles, concepts and standards have been developed over a period of time. This lesson dwells upon the different dimensions of accounting, accounting concepts, accounting principles and the accounting standards.
Accounting as an information system
DEFINITION of 'Accounting Information System - AIS'
The collection, storage and processing of financial and accounting data that is used by decision makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology resources. The resulting statistical reports can be used internally by management or externally by other interested parties including investors, creditors and tax authorities.
An accounting information systems that combines traditional accounting practices such as the Generally Accepted Accounting Principles (GAAP) with modern information technology resources. Six elements compose the typical accounting information system:
• People - the system users.

• Procedure and Instructions - methods for retrieving and processing data.

• Data - information pertinent to the organization's business practices.
• Software - computer programs used to process data.
• Information Technology Infrastructure - hardware used to operate the system.

• Internal Controls - security measures to protect sensitive data.

An accounting information system (AIS) is a structure that a business uses to collect, store, manage, process, retrieve and report its financial data so that it can be used by accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors and regulatory and tax agencies. In particular, specially trained accountants work with AIS to ensure the highest level of accuracy in a company's financial transactions and recordkeeping and to make financial data easily available to those who legitimately need access to it, all while keeping data intact and secure.