Items included in the credit side of the trading account

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Followings are the items which are included in the credit side of the trading account.

Both cash sales and credit sales are included in trading account.

2.Sales returns
Sales returns must be deducted from total sales and to be shown in the credit side of trading account. Sales returns are the sold goods which are returned from customers.

3.Closing stock
Closing stock means the value of goods which are remain unsold in a particular accounting period. Closing sock may be in the form of raw materials ,. work in progress or finished goods. Closing stock is valued at cost or market price.

Related Topics
Items Included In The Debit Side Of Trading Account
Advantages Of Trading Account
Importance Of Trading Account
Concept And Meaning Of Trading Account

Items included in the debit side of the trading account

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Followings are the items which are include in the debit side of the trading account

1. Opening Stock:

Opening stock consists of raw materials , work in progress and finished goods depending upon the nature of business. In merchandising business , the opening stock consists of finished goods. In manufacturing concern , opening stock consists of raw materials.

2. Purchase

Purchase includes both credit purchase and cash purchase. Purchase is available in trial balance.

3. Purchase Returns

Purchase returns is appear in the credit side of trial balance. Purchase returns may be shown by deduction from purchases.

4. Direct Expenses

Direct expenses means all the expenses which are directly attributable to the purchase of goods. These are the some examples of direct expenses.

a. Direct labour or direct wages.

b. Freight on purchase.

c. Carriage on purchase.

d. Fuel , power and lighting expenses.

e. Packing charges.

f. Manufacturing expenses.

g. Commission on purchase.

h. Royalty

Advantages Of Trading Account

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Following Are The Major Benefits Or Advantages Of Trading Account

1. Trading account shows the relationship between gross profit and sales that helps to measure profitability position.

2. Trading account shows the ratio between cost of good sold and gross profit.

3. Trading account gives the information about efficiency of trading activities.

4. Trading account helps to compare between cost of good sold and gross profit.

5. Trading account provides information regarding stock and cost of good sold.

Importance Of Trading Account

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It is very important to find out gross profit or loss for the business to know whether purchasing, manufacturing and sales are sufficient for earning or not.The main objectives or important of trading account are as follows.

1.Trading account helps to know gross profit or loss.

2.Trading account provides information about the direct expenses.

3.Trading account provides safety against possibilities of loss.

4.Trading account helps in comparison of closing stock with last year's stock

Concept And Meaning Of Trading Account

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Introduction To Trading Account

The first step of final account is trading account.Trading account is nominal account which is prepared at the end of accounting year. Trading account helps to find out gross profit or gross loss during the accounting period. Trading account consists of two sides 'debit and credit' . All direct expenses are debited and direct incomes are credited in trading account.Trading account contains mainly purchase of goods , sale of goods and expenses relating to the daily operation of factory.

Preparation of Final Account

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Final account is the combination of income statement and balance sheet. The final account is prepared at the end of every year which may be a calendar year or other also.

Normally final account includes the following items.

1. Trading Account

2. Profit and loss Account

3. Profit and loss Appropriation Account

4. Balance Sheet

Concept And Meaning Of Final Account

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Final Account is the final process of accounting. Final account is prepared to show the final result of the company in a specific period. Final account is also known as financial statement.Profit and loss account and balance sheet are included in final account.Profit and loss account shows the profitability achieved during the accounting period and balance sheet reflects the composition of various assets, liabilities, and share holder's equity on the accounting period.

Items Included In The Liabilities Side Of The Balance sheet

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1. Fixed Liabilities
Those liabilities which are payable to the owners only on the liquidation of the company after making the payment of other outside liabilities are called fixed liabilities.

2.Current Liabilities
Current liabilities are those type of liabilities which are payable out of current assets within the next accounting period.Bills payable,short term bank overdraft are the examples of current liabilities.

3.Long term Liabilities
Long term liabilities are those liabilities which are not payable within the next accounting period but will be payable within next few years. Debentures are the example of long term liabilities.

Items Included In The Assets Side Of Balance Sheet

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1.Fixed Assets
Those assets which are acquired and held permanently for a long time in the business are fixed assets.

2.Current Assets
Those assets which can not be put to constant uses and intended for resale or which in the ordinary course of business will be converted into other assets are current assets.

3.Intangible Assets
Intangible assets are those assets which can not be touched,seen and have no volume but have value.

4.Wasting Assets
Those assets which are depicted gradually or exhausted in the process of earning income are known as wasting assets.

Items Included In The Balance Sheet

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Items Included In The Assets Side Of Balance Sheet

1. Fixed Assets
2. Current Assets
3. Wasting Assets
4. Intangible Assets
5. Investments
6. Fictitious Assets

Items Include In The Liabilities Side Of Balance Sheet

1. Fixed Liabilities
2. Long Term Liabilities
3. Current Liabilities
4. Contingent Liabilities

Concept And Meaning Of Balance Sheet

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Balance Sheet is a tabular statement of balances carried forward after closing the books of account kept according to principles of accounting.Balance sheet is a statement prepared with a view to measure the financial position of a business on a certain fixed date.Balance sheet indicates the financial position of a concern by its assets on a given date and its liabilities on that date.Excess of assets over liabilities represents capital or net worth or shareholders' fund and is indicative of the financial soundness of a company.

Differences Between Financial Accounting And Management Accounting

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Main distinctions between Financial and Management Accounting.

1. The main objective of financial accounting is to measure business income and communication of business information to the various categories of persons like management , creditors , suppliers , bankers , investors etc.whereas the main objective of management accounting is to help the internal management.

2. The financial accounting deals with all the activities of the business , assesses results of the business as a whole and reveals the overall performance and position of the enterprise whereas management accounting is limited in its coverage. Management accounting concerns with the activities of the different units , departments or divisions and deals with significant activities of the business.

3. Financial accounting lays emphasis on the past activities and represents historical records whereas management accounting stresses the future and uses historical costs and data for estimating the future.

4.Financial accounting records the transactions relating to income , expenses , revenue , personal accounts whereas management accounting reports costs and revenue by profit center or responsibility center.

Limitations Of Management Accounting

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Though management accounting is helpful tool to the management as it provides information for planning, controlling and decision making, still its effectiveness is limited by a number of reasons. Some of the limitations of management accounting are as follows:

1. Based On Accounting Information
Management accounting is based on data and information provided by financial accounting and cost accounting. As such the correctness and effectiveness of managerial decisions will depend upon the quality of data provided by cost and financial accounts. So, effectiveness of management account is limited to the reliability of sources of information.

2. Lack Of Knowledge
The use of management accounting requires the knowledge of number of related subjects. Deficiency in knowledge in related subjects like accounting principles, statistics, economics, principle of management etc. will limit the use of management accounting.

3. Intensive Decisions
Decision taking based on management accounting that provide scientific analysis of various situations will be time consuming one. As such management may avoid systematic procedures for taking decision and arrive at decision using intuitive. And intuitive limit the usefulness of management accounting.

4. Management Accounting Is Only A Tool
The tools and techniques of management accounting provide only information and not decisions. Decisions are to be taken by the management and implementation of decisions are also done by management.

                     Also Read: Roles Of Management Accounting

5. Evolutionary Stage
Management accounting is still in a development stage and has not yet reached a final stage. The techniques and tools used by this system give varying and differing results. It is still named as internal accounting and/ or operational accounting.

6. Personal Prejudices And Bias
The interpretation of financial information may differ from person to person depending upon the capability of the interpreter. Analysis and interpretation of data and information may be influenced by personal basis. As such, the objectivity of decision may be affected by personal prejudices and bias.

                   Also Read: Merits Of Management Accounting

7. Psychological Resistance
Changes in traditional accounting practices and organizational set up are required to install the management accounting system. It call for a rearrangement of the personnel and their activities and framing of new rules and regulations which generally may not be liked by the people involved.

Merits Of Management Accounting

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Following advantages from the management accounting system may enjoy by a business:

1. Management accounting analyze and interpret systematically the information collected from within and outside the business and communicate the result to the management. This will help in implementing managerial policy decision effectively.

2. Management accounting helps in comparing actual performance with the budgeted standard and reporting management by deviations of corrections.

3. All the business activities are planned well ahead base on the accounting information applying budgeting and forecasting techniques. As such, all the activities are expected to be interwoven and well integrated to achieve the set goal. The said budgeting and forecasting techniques are efficiently applied with the help of management accounting.

4. Management accounting techniques help the business control its activities efficiently. It helps in utilizing its capital in an optimal way.

5. The management accounting often takes cognizance of the changes in the economic environment caused by government policies and other economic forces. This helps the business combat and accommodate it to such changes. Even the management accounting helps the business to get rid of the seasonal and cyclical fluctuations.

6. Management accounting facilitates coordination between different departments and helps in attaining the objectives of the business as a whole.

7. Management accounting plays a significant role in organizing the business on a sound footing. It assist the management with the help of internal control and internal audit in fixing targets, responsibilities, appraisal of performance, problem and solutions of these cost and profit centers and executing overall control of business activities.

8. Management accounting often compares the actual performance with the standard and analyze the reasons for any deviation there have and offers suggestions to take corrective measures.

Scope Of Management Accounting

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The scope or field of management accounting is very wide and broad based and it includes a variety of aspects of business operations. The main aim of management accounting is to help management in its functions of planning, directing, controlling and areas of specialization included within the admit of management accounting. The scope of management accounting can be studied as follows:

1. Financial Accounting
Financial accounting forms the basis for analysis and interpretation for furnishing meaningful data to the management. The control aspect is based on financial data and performance evaluation, on recorded facts and figures. So, management accounting is closely related to financial accounting in many respects.

                     Also Read: Concept And Meaning Of Management Accounting

2. Cost Accounting
Cost accounting is the process and techniques of ascertaining cost. Planning, decision making and control are the basic managerial functions. The cost accounting system provides the necessary tool for carrying out such functions efficiently. The tools includes standard costing, inventory management, variable costing etc.

3. Budgeting And Forecasting
Budgeting means expressing the plans, policies and goals of the firm for a definite period in future. Forecasting on the other hand, is a prediction of what will happen as a result of a given set of circumstances. Forecasting is a judgement whereas the budgeting is an organizational object. These are useful for management accounting in planning.

                          Also Read: Roles Of Management Accounting

4. Inventory Control
Inventory is necessary to control from the time it is acquire till its final disposal as it involves large sum. For controlling inventory, management should determine different level of stock. The inventory control technique will be helpful for taking managerial decisions.

5. Statistical Method
Statistical tools not only make the information more impressive, comprehensive and intelligible but also are highly useful for planning and forecasting.

                        Also Read: Merits Of Management Accounting

6. Interpretation Of Data
Analysis and interpretation of financial statements are important part of management accounting. After analyzing the financial statements, the interpretation is made and the reports drawn from this analysis are presented to the management. Interpreting the accounting data to the authorities in the management is the principal task of management accounting.

7. Reporting To Management
The interpreted information must be communicated to those who are interested in it. The report may cover Profit and Loss Account, Cash Flow and Funds Flow statements etc.

                     Also Read: Limitations Of Management Accounting

8. Internal Audit And Tax Accounting
Management accounting studies all the tax matters to assist the management in investment decisions vis-a-vis tax planning as a resource to enjoy tax relief.
Internal audit system is necessary to judge the performance of every department. Management is able to know deviations in performance through internal audit. It also helps management in fixing responsibility of different individuals.

9. Methods Of Procedures
This includes maintenance of proper data processing and other office management services. It may have to deal with filing, copying, duplicating, communicating and management information system and also may have to report about the utility of different office machines.

Functions Of Management Accounting

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Key functions of management accounting are as follows:

1. Forecasting and planning.

2. Coordinating.

3. Organizing.

4. Controlling
5. Financial Analysis and interpretation.

6. Communications.

7. Motivating.

8.Decision making.

Role Of Management Accounting

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The main objectives or roles of management accounting are as follows.

1. Assistance in planning and formulation of future policies.

2. Management accounting helps in controlling performance.

3. Management accounting helps in interpretation of financial information.

4. Management accounting helps in coordinating operations.

5. Management accounting helps in organizing.

6. Management accounting helps in evaluating the efficiency and effectiveness of policies.

7. Management accounting helps in motivating employees.

8. Management accounting helps in the solution of business problems.

Related Topics
Concept And Meaning Of Management Accounting
Functions Of Management Accounting
Scope Of Management Accounting
Merits Of Management Accounting
Limitations Of Management Accounting

Concept And Meaning Of Management Accounting

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Introduction To Management Accounting

Management accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day to day operation of an undertaking.Management accounting relates to the use of accounting data collected by financial and cost accounting for the purpose of policy formulation, planning , control and decision-making by the top management. Management accounting uses all techniques of financial and cost accounting to help management to make decision in a scientific manner.

Differences Between Financial Accounting And Cost Accounting

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The main differences between financial accounting and cost accounting are given as under.

1.Financial accounting provides information about the business in general way.Financial accounting tells about the profit and loss and financial position of the business.Cost accounting provides information to the management for proper planning,control and decision making.

2. Financial accounting classifies,records and analyses the transactions in subjective manner or according to the nature of expenses.Cost accounting records the expenditure in an objective manner or according to the purposes for which the cost are incurred.

3.Financial accounts are the accounts of the whole business.Cost accounting is only a part of financial accounts.

4. Financial accounts are relate to commercial transactions of the business.Cost accounts are related to transactions connected with the manufacture of goods and services.

5.Financial accounts disclose the net profit or loss of the business as a whole.Cost accounts disclose profit or loss of each product, job or service.

Concept And Meaning Of Cost Accounting

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Cost accounting has been developed due to limitations of financial accounting. Financial accounting is concerned with record keeping directed towards the preparation of Profit and Loss Account and Balance Sheet. It provides information regarding the profit and loss which is helpful for the management to control the major functions of business like finance , administration , production and distribution.But details regarding operating efficiency to these divisions are lacking in financial accounting.

Cost accountancy is the application of costing and cost accounting principles,methods and techniques to the science , art and practice of cost control and the ascertainment of profitability.

Concept And Meaning Of Financial Accounting

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Financial accounting is a branch of accounting which is concerned with the preparation of financial statements for decision makers. Financial accounting is used to prepare accounting information for internal and external users. Therefore financial accounting may be defined as the process of summarizing financial data and publishing annual reports for the benefit of the people inside and outside the organization.

Limitations Of Financial Statements

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The financial statements suffer from the following limitations:

1. Financial statements include the quantitative information which is expressed in monetary units. They do not provide any qualitative information which may have greater impact upon the decision makers.

2. Financial statements record and reveal only the historical data in nature. They do not include any future possible results.

3. Financial statements are strictly confined within the boundary of some accounting principles. They are used as the guidelines in recording and reporting the financial transactions.

4. Financial statements are just the summary reports of the company's financial transactions. All the detailed information regarding to such transactions cannot be disclosed in the financial statements.

5. Financial statements show the information on cost basis i.e. the price paid on the transaction's date. The effect of price level changes (inflation) is not shown in the financial statements. In other words, the information are not given in the current value.

Importance Of Financial Statements

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Financial statements are the important sources of information to all the users of accounting information like; management, owners, debtors, creditors, employees, government agencies, financial analysts, etc. The following are the points which highlight the importance of financial statements:

1. Financial statements are the summary of information relating to profitability, and resources owned by the firm.

2. Financial statements provide the information which can be compared with those of other firms.

3. Employees can use financial statements to demand for increment in salary and other benefits.

4. Bankers and other financial institutions can use financial statements to make the lending decisions.

                     Also Read: Concept, Features And Objectives Of Financial Statements

5. Government bases on financial statements of the companies for the calculation of tax revenue from the firms.

6. Financial statements can be used as the basis for management decision-making purpose like planning, promotion, research and development decisions etc.

7. Existing investors can use financial statements to assess how efficiently the firm is using their funds.

8. Potential investors can obtain information with the help of financial statements which can be useful to take investment decisions.

                     Also Read: Limitations Of Financial Statements

9. Financial statements reveal the history of the firm.

10. Financial statements can be used to assess the firm's liquidity and solvency position.

Concept, Features And Objectives Of Financial Statements

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Concept Of Financial Statements

Past events and performances serve as background for making projections if they are to be realistic.The financial statements provide important information concerning past financial transactions and their effects om the profitability and the financial position of the business. Various users of financial statements such as owners , investors , creditors , management etc. must make an analysis of financial statements to make right decision. Therefore financial statements are the means of conveying to owners , management or to interested outsiders a concise picture of profitability and financial position of the business. Financial statements are the end products of the accounting process which give a concise accounting information of the period after the accounting period is over.

Financial statements are the summary reports of a company's financial transactions. They report the end results of accounting activities during a given period of time. Financial statements provide the income or loss and financial position of a company. Financial statements are end of the period accounts prepared to show the profit or loss situation for a period of time and to assess the financial position and cash flow situation on a particular date. Financial statements report the result of past activities. Therefore, the are also called as the historical record of a company.

                          Also Read: Importance Of Financial Statements
Financial Statements Include:

1. Income Statement
The income statement, sometimes called as the trading and profit and loss account or an earning statement, reports the profitability of a business organization for a stated period of time. In accounting, we measure profitability for a period, such as month or year by comparing the revenues generated with the expenses incurred to produce these revenues.

2. Statement Of Retained Earnings
The statement of retained earnings is also called as profit and loss appropriation account. One purpose of this statement is to connect the income statement and the balance sheet. The statement of retained earnings explains the changes in retained earnings between two balance sheet date. These changes usually consist of the addition of net income and the deduction of dividends.

3. Balance Sheet
The balance sheet, sometimes called statements of financial position, lists the company's assets, liabilities and stockholder's equity as on a particular date. A balance sheet is like a snap shot that captures the financial position of a company at a particular point of time.

4. Statement Of Cash Flows
Management is interested in the cash inflows to the company and the cash outflows from the company, because they determine the company's liquidity, its ability to pay its bills when due. The statement of cash flows shows the cash inflows and outflows from operating, investing and financing activities.

                                Also Read: Limitations Of Financial Statements

Features Of Financial Statements
The following are the features of financial statements:

1. Financial statements are always expressed in monetary terms. They ignore qualitative aspects. In other words, the non-monetary events do not come under the scope of financial statements.

2. Financial statements are always prepared for a certain period of time. They generally cover the period of one year.

3. Financial statements are historical in nature since they always present the past performance. Hence, they do not carry the futuristic approach.

Objectives Of Financial Statements
Financial statements of a company are the result of management's past actions and decisions. They are the end products of the accounting process. They give a picture of solvency and profitability of a company. The major objectives of the financial statements are as follows:

1. To provide the financial information to the internal and external users.
2. To provide the information, which are useful in the decision making process.
3. To reveal the profitability and solvency of the company.
4. To help to evaluate the financial position and efficiency of the management.
5. To show the financial health of the company.

Limitations Of Accounting

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The followings are the main limitations of Accounting.

1. Accounting records only those transactions which can be measured in monetary terms.

2. Accounting transactions are recorded at cost in the books.The effect of price level changes is not brought into the books with the result that comparison of the various years becomes difficult. For example, the sale to total asset in 2009 would be much higher than in 2002 due to rising prices , fixed assets being shown at the cost and not at market price.

3. Accounting statements are prepared by following basic concepts and conventions. Therefore the accounting information may not be realistic.

4. Accountant may select any method of depreciation , valuation of stock, amortization of fixed assets , treatment of deferred revenue expenditure. Therefore accounting statements are influenced by the personal judgement of the accountant.

Internal Users Of Accounting Information

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Internal users of accounting information are persons related to the organisation itself.

1. Owners : Business owners want to know whether their funds are being properly used or not. Accounting information helps them them to know the profitability and the financial position of the concern in which they have invested their funds.

2. Management: Accounting information is called the eyes and ears of management.It helps a manager in appraising the performance of the subordinates.

3. Employees : Employees of the organisation can get the actual information about the financial position of their organisation with the help of financial statements prepared by the accountant.

External Users Of Accounting Information

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Accounting provides the information which is useful for persons or groups inside or outside the organisation.

External Users of accounting information :

1. Investors : Those who want to invest money in an organisation want to know the financial health of the organisation. They need accounting information which will help them in evaluating past performance and future prospects of the organisation.

2. Creditors : Creditors means supplier of goods and services on credit , banks and lenders of money who want to know the financial position of a concern before providing loans or granting credit.They need accounting information relating to current assets , quick assets and current liabilities which is available in the financial statements.

                     Also Read: Internal Users Of Accounting Information

3. Members Of Non Profit Organisations : Non profit organisations such as hospitals , clubs , schools, colleges etc. need accounting information to know how their contributed funds are being utilised. This information helps them to make decision regarding future support.

4. Government : Government wants to know earnings or sales for a particular period for the purpose of taxation. Income tax returns are examples of financial reports which are prepared with information taken from accounting.

                  Also Read: Users Of Accounting Information

5. Research Scholars : Accounting information helps research scholars who wants to make a study into the financial operation of a particular firm.

Users Of Accounting Information

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The basic objective of accounting is to provide information which is useful for persons inside and outside the organisation.Accounting provides the information to the external and internal users which may base decisions that results in the allocation of economic resource in society.

External users of accounting information are those groups or persons who are outside the organisation for whom accounting function is performed.Internal users of accounting information are those persons or groups who are inside the organisation.

Classification Of Accounting

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Accounting may be classified into the following types.

1. Financial Accounting:

Financial accounting is maintained to record business transactions in the books of accounts so that operating results and financial condition for a particular period on a particular date can be known.

2. Cost Accounting:

The process of accounting for cost which begins with recording of expenditure and ends with the preparation of statistical data is called cost accounting.

3. Management Accounting:

Management accounting is related to the use of accounting data collected with the help of financial and cost accounting for the purpose of policy formulation , planning , control and decision making by the management.

Functions Of Accounting

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Accounting has to perform two distinct functions.

1. Historical Function Of Accounting

Historical function of accounting relates to recording , classifying , summarising , analysing and interpreting past transactions. This functions reports at regular intervals to managers , owners and other parties by means of financial statements.

2. Managerial Function Of Accounting

Managerial function of accounting is helpful in planning future activities of the organisation and in controlling daily operations by comparing the actual results with pre-determined standards. This is done with a view to promoting maximum operational efficiency.

Objectives Of Accounting

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The main objective of accounting is to provide information about the financial condition of the organisation to internal and external users.

Other objectives of accounting are as follows.

1. Accounting helps on making decisions concerning more rational acquisition of limited resources through better decision choices.

2.Accounting helps for efficient use of available resource through prompt detection of inefficiencies.

3.Accounting helps for more equitable distribution of resources.

4.Accounting helps to make policy decisions relating to change in the system.

5. Accounting helps discharge of the social responsibilities of the business and industry.

6.Accounting Provides accounting data to the Government for taking decisions on excise duties, sales taxes etc.

Introduction Of Accounting

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Concept And Meaning Of Accounting

Accounting may be defined as the systematic recording , summarizing and analyzing of financial transactions and reporting the results.The main purpose of accounting is to show the exact financial condition of the business .Accounting helps to ascertain profit or loss during a specified period.It also helps to have control over the firms property.Therefore accounting is the art of recording and classifying business transactions and events in monetary terms.In the recent years accounting is defined as the art of communicating financial information about a business entity to external and internal users. External users of accounting information are investors , creditors , consumers , research scholars , government etc. Internal users of accounting information means owners, management and employees.