Meaning of Accountancy and How it Differs From Accounting

As a business grows, the number of business transactions like issuing invoices, maintaining stock records, keeping records of tax paid etc., increases multiple folds. It becomes very important to keep proper records of what goes in business. This record-keeping help in finding out the amount payable to suppliers or the amount receivable from credit sales and extracting valuable information. These records are collectively called books of accounts, and three terms that you will come across are BookKeeping, Accounting and Accountancy. Generally, accounting and accountancy are used interchangeably. But both are quite different in their scope. 

Did you know? Luca Pacioli is the father of Accounting.

What Is Accountancy?

Accountancy is a much wider area of work.  As per collins dictionary, the accountancy definition is “the profession or business of an accountant.”  So, in other words, an accountant's scope of work is accountancy. To understand accountancy meaning we need to understand what works are carried out by an accountant.

    If we bifurcate the work of an accountant, it includes

• Preparing books of accounts: an accountant is responsible for properly maintaining the books of accounts. That involves summarisation, classification and recording of financial transactions.
• Preparation of financial statements: After books of accounts, accountants prepare financial statements. They are the documents that show a business's financial status at the year-end. The financial statement consists of the balance sheet, profit and loss account, cash flow statements, and fund flow statements.
• Ratios analysis: the main motive for preparing financial statements is to analyse them and draw conclusions. Ratios are one of the tools for analysis. An accountant calculates various types of ratios from financial statements and uses them for comparison with the previous year's ratios or comparing with industry ratios. This help in finding out whether the company’s performance improved or declined.
• Tax calculations and return preparations: there are majorly two types of taxes in India Income tax and GST. Accountants, on a regular basis, calculate the tax payable and file tax returns. They can calculate by the books of accounts and financial statements. 
• Budgeting: Accountants, by taking past records of a business, prepare different types of budgets. The different types of budgets like columns get an operating budget, overhead budget etc.

Accountancy is like an umbrella covering the recording and maintenance of transactions, report preparations, interpretation and analysis and tax calculations.

Also Read: What Are Expenses in Accounting?

What Is Accounting? 

Now you have an idea about accountancy, and it would be a bit easy to understand accounting. Accounting is centuries old and can be traced back to many different civilisations. But first written accounting book was by Luca Pacioli, and that is why he is known as the father of Accounting.

Accounting is the process of identifying and recording the financial transactions of a business. The process consists of collecting invoices and bills and then entering them as journal entries, posting them to the ledger and so on. To understand it, one should look at the steps involved in accounting. Let's look into the steps.

• Invoices: The very first step is identifying and collecting bills, invoices and any other supporting documents for the business transactions. For example, Internet bills, purchase bills, purchase orders and cash vouchers for small petty expenses.  
• Journal entries: The transactions are recorded as journal entries. Few small businesses follow a single entry system, but the proper way to record transactions is a Double entry system. Under a double-entry system, a transaction affects a minimum of two accounts. For example Mr A sales goods for ₹1000 cash. The two effects of the transaction are that Mr A received ₹1000 cash and made sales. The journal entry will be 

Also Read: What Is an Accounting Information System? Explained

To make journal entries easy, there are three golden rules of accounting. Lets's have a peek into them (For a detailed understanding, refer to this article Golden rules of accounting)

• Debit the receiver and credit the giver: this rule is applied to personal accounts means those accounts which are of persons, like debtors and creditors. For example, if Mr B gives a loan to the business as per the rule “credit the giver”, Mr B’s account will be credited.  
• Debit what comes in and credit what goes out: This applies to real accounts. The machinery, furniture, land etc., are the real accounts. So when you buy any fixed assets like a car, the car account will be debited. 
• Debit all expenses and losses Credit all income and gains: this is for nominal accounts. Nominal accounts are the accounts that are revenue or expenses like interest received, rent paid, and electricity paid.
• Trial Balance: next step is the preparation of trial balance. It is a type of summary report of all the accounts of the business which have a balance at the year-end. It is a three-column statement. One column is for the name of accounts, and the other two columns, debit and credit, are for the closing balances. If the debit and credit columns do not match, that means there is some error in journal entries. 
• Rectification: If there is any mistake in the journal entries passed. Those entries are not erased or deleted. Instead, new journal entries are passed to correct the balance. 
• Financial Statements: the last step in accounting is preparing a balance sheet, profit and loss and cash flow statement. They are the end product of the accounting process.

What Is the Difference Between Accounting and Accountancy?

Both the terms are commonly used to maintain business records. But there are significant differences.

Also Read: The Complete Guide to Cost and Management Accounting

Different Branches of Accounting  

Previously, there was only finance, but with time, different branches of accounting have evolved. Let's know about them. 

• Financial accounting: it is the core or main type of accounting. It provides data for other sectors and lays the foundation for other types of accounting.
• Cost accounting: this deals with the recording of cost data. It records material bought, the amount paid to labour and the amount and expenses paid for manufacturing a product. 
• Management accounting: it is the recently developed accounting system. It is a recording of the impact of management decisions on the company. And providing financial information that will help in management decision-making. 
• Human resource accounting:  It involves the valuation of the human resource of the company. It is a way to measure the worth of human resources in financial terms.

Conclusion:

Accountancy is a profession that can be pursued. It provides a systematic basis and structure for accounting. For carrying out proper accounting, one needs to know about accountancy. They both complement each other. A proper accounting process can only be followed when it is as per the techniques, principles, and rules led down by the accountancy. 

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.