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Spring 2014 SMU MBA assignments answer of MB0041 Q1. Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events. Explain the accounting process and write the objectives of accounting.

AnswerThe definition was given by American Institute of Certified Public Accountants (AICPA) in 1941 are “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 a financial character, and
interpreting the results there of.”

The Accounting processes are:
 1. Identifying the transactions and events – This is the first step in the accounting process. It recognises the transactions of financial character that are essential to be recorded in the books of accounts. When money, goods, or services are transferred from one person or account to another person or account, it is known as a transaction.

 2. Measuring – This means expressing the value of events and transactions in terms of money (Rupees in India).
 Measuring has become an important challenge for the accountants and the business entities. This is due to the following reasons:
 a) Changing nature of business activities – The complexity of today’s business models has also changed the way accounting needs to be done. Technology enabled services like web designing and financial services like wealth management are the thriving businesses. The nature of such business activities is such that it becomes difficult to measure the transactions in terms of money.
 b) Business crossing international borders – All business entities today, whether small or big, have transactions crossing the borders. They have spending or earnings and payables and receivables in foreign currencies. Measuring such transactions is a big challenge as they have to be translated into home currency before they can be recorded.
3. Recording – The next process after measuring the transactions is the recording. It deals with recording of identified transactions and events in a systematic manner in the books of original entry in accordance with the principles of accountancy. The book in which transactions are first recorded is called the Journal.

4. Classifying – All the recorded transactions do not make any sense unless they are processed and presented in a manner that is useful to the intended user. The functions of classifying and summarising serve this purpose. Classifying deals with periodic grouping of transactions of similar nature. For this purpose, a separate book called Ledger is maintained. It is a book where transactions of similar nature are maintained at one place. The transactions that appear in the books of original entry (Journal) are transferred to appropriate places in the book of final entry (Ledger) by a process called Posting.
For example, all purchases of goods made for cash or on credit on different dates are brought to purchases account.

5. Summarising – The end objective of any business is to make profit. To know if this objective was achieved, it is necessary to summarise all the transactions that occurred and are recorded. This requires analysing total expenses or losses, total income or gain, total assets, and total liabilities. This function involves the preparation of financial statements such as income statement, balance sheet, statement of changes in financial position, and cash flow statement.

6. Analysing – It deals with the establishment of relationship between the various items or group of items taken from income statement or balance sheet or both. Its purpose is to identify the financial strengths and weaknesses of an enterprise. It involves using various tools like Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, etc. (discussed in subsequent units).

7. Interpreting – This step explains the importance of all the datas in a manner that the end users of financial statements can make a meaningful judgment about the financial position and profitability of the business.

8. Communicating – It deals with communicating the analysed and interpreted data in the form of financial reports or statements to the users of financial information. For example, Profit and Loss account, Balance Sheet, Cash Flow and Funds Flow statement, Auditor’s report, etc. It is an important part of Accounting to decide what to communicate, how to communicate, how much to communicate, when to communicate, and in what form to communicate. 


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