ACCOUNTING AS A SOURCE OF INFORMATION

Accounting as a Source of Information

Accounting is a definite processes of interlinked activities,  that begins with the identification of transactions and ends with the preparation of financial statements. Every step in the process of accounting generates information. Generation of information is not an end in itself. It is a means to facilitate the dissemination of information among different user groups. Such information enables the interested parties to take appropriate decisions. Therefore, dissemination of information is an
essential function of accounting. To be useful, the accounting information should
ensure to:

• provide information for making economic decisions;

• serve the users who rely on financial statements as their principal source of information;

• provide information useful for predicting and evaluating the amount, timing and uncertainty of potential cash-flows;

• provide information for judging management’s ability to utilise resources effectively in meeting goals;provide factual and interpretative information by disclosing underlying assumptions on matters subject to interpretation, evaluation, prediction, or estimation; and

• provide information on activities affecting the society.The role of an accountant in generating accounting information is to observe,screen and recognise events and transactions to measure and process them, and thereby compile reports comprising accounting information that are
communicated to the users. 

IDENTIFICATION, MEASUREMENT, RECORDING AND COMMUNICATION

Identification, Measurement, Recording and Communication
Identification : It means determining what transactions to record, i.e., to identity events which are to be recorded. It involves observing activities and selecting those events that are of considered financial character and relate to the organisation. The business transactions and other economic events therefore are evaluated for deciding whether it has to be recorded in books of account.
For example, the value of human resources, changes in managerial policies or appointment of personnel are important but none of these are recorded in books of account. However, when a company makes a sale or purchase, whether on cash or credit, or pays salary it is recorded in the books of account.

Measurement : It means quantification (including estimates) of business transactions into financial terms by using monetary unit, viz. rupees and paise as a measuring unit. If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts. That is why
important items like the appointment of a new managing director, signing of contracts or changes in personnel are not shown in the books of accounts.

Recording : Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in a chronological order. Recording is done in a manner that the necessary financial information is summarised as per well-established practice and is made available as and when required.

Communication : The economic events are identified, measured and recorded in order that the pertinent information is generated and communicated in a certain form to management and other internal and external users. The information is regularly communicated through accounting reports. These reports provide information that are useful to a variety of users who have an interest in assessing the financial performance and the position of an enterprise, planning and controlling business activities and making necessary decisions from time to time. The accounting information system should be designed in such a way that the right information is communicated to the
right person at the right time. Reports can be daily, weekly, monthly, or quarterly, depending upon the needs of the users. An important element in the communication process is the accountant’s ability and efficiency in presenting the relevant information.

ECONOMIC EVENTS

Economic Events

Business organisations involves economic events. An economic event is known as a happening of consequence to a business organisation which consists of transactions and which are measurable in monetary terms. For example, purchase of machinery, installing and keeping it ready for manufacturing is an event which comprises number of financial transactions such as buying a machine, transportation of machine, site preparation for installation of a machine, expenditure incurred on its installation and trial runs. Thus, accounting identifies bunch of transactions relating to an economic event. If an event involves transactions between an outsider and an organisation, these
are known as external events.

 The following are the examples of such transactions:
• Sale of merchandise to the customers.

• Rendering services to the customers by ABC Limited.

• Purchase of materials from suppliers.

• Payment of monthly rent to the landlord.

An internal event is an economic event that occurs entirely between the internal wings of an enterprise, e.g., supply of raw material or components by the stores department to the manufacturing department, payment of wages to the employees, etc.

INTRODUCTION TO ACCOUNTING

INTRODUCTION TO ACCOUNTING

Accounting is famously known as the "language of business". Through the financial statements, the end-product reports in accounting, it delivers information to different users.

Meaning of Accounting

• In 1941, The American Institute of Certified Public Accountants (AICPA) had defined accounting as 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 financial character, and interpreting the results thereof’. With greater economic development resulting in changing role of accounting, its scope, became broader. In 1966, the American Accounting Association (AAA) defined accounting as ‘the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information’.
• In 1970, the Accounting Principles Board of AICPA also emphasised that the function of accounting is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.

Accounting can therefore be defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information. In order to appreciate the exact nature of accounting, we must

understand the following relevant aspects of the definition:

• Economic Events

• Identification, Measurement, Recording and Communication

• Organisation

• Interested Users of Information

PERQUISITES

Perquisites

The term ‘perquisite’ indicates some extra benefit in addition to the amount that may be legally due
by way of contract for services rendered. In modern times, the salary package of an employee
normally includes monetary salary and perquisite like housing, car etc.

Perquisite may be provided in cash or in kind.

Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.
Perquisite may arise in the course of employment or in the course of profession. If it arises from a
relationship of employer-employee, then the value of the perquisite is taxable as salary. However, if
it arises during the course of profession, the value of such perquisite is chargeable as profits and
gains of business or profession.

Perquisite will become taxable only if it has a legal origin. An unauthorised advantage taken by an
employee without his employer’s sanction cannot be considered as a perquisite under the Act.

LUMPSUM PAYMENT OR OTHERWISE

Lumpsum Payment or otherwiseLumpsum payment or otherwise received by an employee at the time of voluntary retirement would
be taxable as “profits in lieu of salary”.

Exemption of Voluntary Retirement Receipts [Section 10(10C)]

Voluntary retirement receipt would be exempt under section 10(10C), subject to the following
conditions:

Eligible Undertakings - The employee of the following undertakings are eligible for exemption
under this clause:

(i) Public sector company

(ii) Any other company

(iii) An authority established under a Central/State or Provincial Act

(iv) A local authority

(v) A co-operative society

(vi) An University established or incorporated under a Central/State or Provincial Act and an
Institution declared to be an University by the University Grants Commission.

(vii) An Indian Institute of Technology

(viii) Such Institute of Management as the Central Government may, by notification in the Official
Gazette, specify in this behalf

(ix) Any State Government

(x) The Central Government

(xi) An institution, having importance throughout India or in any state or states, as the Central

Government may specify by notification in the Official Gazette.

Limit: The maximum limit of exemption should not exceed ` 5 lakh.

Such compensation should be at the time of his voluntary retirement or termination of his service, in
accordance with any scheme or schemes of voluntary retirement or, in the case of public sector
company, a scheme of voluntary separation. The exemption will be available even if such
compensation is received in installments.

Guidelines:

The schemes should be framed in accordance with such guidelines, as may be prescribed and
should include the criteria of economic viability.

Rule 2BA prescribes the following guidelines for the purposes of the above clause:

1. It applies to an employee who has completed 10 years of service or completed 40 years of age.
However, this requirement is not applicable in case of an employee of a public sector company
under the scheme of voluntary separation framed by the company.

2. It applies to all employees by whatever name called, including workers and executives of the
company or the authority or a co-operative society except directors of a company or a
cooperative society.

3. The scheme of voluntary retirement or separation must have been drawn to result in overall
reduction in the existing strength of the employees.

4. The vacancy caused by the voluntary retirement or separation must not be filled up.

5. The retiring employee of a company shall not be employed in another company or concern
belonging to the same management.

6. The amount receivable on account of voluntary retirement or separation of the employee must
not exceed the amount equivalent to three months’ salary for each completed year of service
or salary at the time of retirement multiplied by the balance months of service left before the
date of his retirement or superannuation.

Notes –

Where any relief has been allowed to any assessee under section 89 for any assessment year in
respect of any amount received or receivable on his voluntary retirement or termination of service
or voluntary separation, no exemption under section 10(10C) shall be allowed to him in relation to
that assessment year or any other assessment year.

Salary for this purpose means basic salary and dearness allowance, if provided in the terms of
employment for retirement benefits, forming part of salary and commission which is expressed as a
fixed percentage of turnover

PROVIDENT FUND

Provident fund

Provident fund scheme is a scheme intended to give substantial benefits to an employee at the
time of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The employer also generally contributes the
same amount out of his pocket, to the fund. The contribution of the employer and the employee
are invested in approved securities. Interest earned thereon is also credited to the account of
the employee. Thus, the credit balance in a provident fund account of an employee consists of
the following:

(i) employee’s contribution

(ii) interest on employee’s contribution

(iii) employer’s contribution

(iv) interest on employer’s contribution.

The accumulated balance is paid to the employee at the time of his retirement or resignation.
In the case of death of the employee, the same is paid to his legal heirs.

The provident fund represents an important source of small savings available to the
Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in a
provident fund account.

(1) Recognised Provident Fund (RPF)
Recognised provident fund means a provident fund recognised by the Commissioner of
Income-tax for the purposes of income-tax. It is governed by Part A of Schedule IV to the Income-tax Act, 1961. This schedule contains various rules regarding the following:

(a) Recognition of the fund

(b) Employee’s and employer’s contribution to the fund

(c) Treatment of accumulated balance etc.

A fund constituted under the Employees’ Provident Fund and Miscellaneous Provisions Act,
1952 will also be a Recognised Provident Fund.

(2) Unrecognised Provident Fund (URPF)

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.Statutory Provident Fund (SPF)

The SPF is governed by Provident Funds Act, 1925. It applies to employees of government,
railways, semi-government institutions, local bodies, universities and all recognised
educational institutions.

(4) Public Provident Fund (PPF)

Public provident fund is operated under the Public Provident Fund Act, 1968. A membership of
the fund is open to every individual though it is ideally suited to self-employed people. A salaried
employee may also contribute to PPF in addition to the fund operated by his employer. An
individual may contribute to the fund on his own behalf as also on behalf of a minor of whom
he is the guardian.

For getting a deduction under section 80C, a member is required to contribute to the PPF a
minimum of ` 500 in a year. The maximum amount that may qualify for deduction on this
account is ` 1,50,000 as per PPF rules.

A member of PPF may deposit his contribution in as many installments in multiples of ` 500 as
is convenient to him. The amount of contribution may be paid at any of the offices or branch
offices of the State Bank of India or its subsidiaries and specified branches of banks or any
Post Office.