Importance of Accounting

Need and Importance of Accounting

When a person starts a business, whether large or small, his main aim is to earn profit. He receives money from certain sources like sale of goods, interest on bank deposits etc. He has to spend
money on certain items like purchase of goods, salary, rent, etc.

These activities take place during the normal course of his business. He would naturally be anxious at the year end, to know the progress of his business. Business transactions are numerous, that it is not possible to recall his memory as to how the money had been earned and spent. At the same time, if he had noted down his incomes andexpenditures, he can readily get the required information. Hence, thedetails of the business transactions have to be recorded in aclear and  systematic manner to get answers easily and accurately for the following questions at any time he likes.

i.    What has happened to his investment?
ii.   What is the result of the business   transactions?
iii.  What are the earnings and expenses?
iv.   How much amount is receivable from customers to whom  goods have been sold on credit?
v.    How much amount is payable to suppliers on account of  credit        purchases?
vi.   What are the nature and value of assets possessed by the  business concern?
vii.  What are the nature and value of liabilities of the business  concern?

These and several other questions are answered with the help
of accounting. The need for recording business transactions in a clear
and systematic manner is the basis which gives rise to Book-keeping.

Book-keeping

Book-keeping is that branch of knowledge which tells us how
to keep a record of business transactions. It is often routine and
clerical in nature. It is important to note that only those transactions
related to business which can be expressed in terms of money are
recorded. The activities of book-keeping include recording in the
journal, posting to the ledger and balancing of accounts.
                                                                                                   

                                                                                                     




 Definition


R.N. Carter says, “Book-keeping is the science and art of correctly recording in the books of account all those business transactions that result in the transfer of money or money’s worth”.





Objectives

The objectives of book-keeping are:

i. to have permanent record of all the business transactions.
ii. to keep records of income and expenses in such a way that the net profit or net loss may be calculated.

iii. to keep records of assets and liabilities in such a way that
the financial position of the business may be ascertained.

iv. to keep control on expenses with a view to minimise the
same in order to maximise profit.

v. to know the names of the customers and the amount due
from them.

vi. to know the names of suppliers and the amount due to
them.

vii. to have important information for legal and tax purposes.

Advantages

From the above objectives of book-keeping, the following
advantages can be noted

i. Permanent and Reliable Record: Book-keeping provides  permanent record for all business transactions, replacing the memory  which fails to remember everything.

ii. Arithmetical Accuracy of the Accounts:With the help of book keeping trial balance can be easily prepared. This is used to check the arithmetical accuracy of accounts.

iii. Net Result of Business Operations: The result (Profit or Loss) of business can be correctly calculated.

iv. Ascertainment of Financial Position: It is not enough to know the profit or loss; the proprietor should have a full picture of his financial position in business. Once the full picture (say for a year)
is known, this helps him to plan for the next year’s business.

v. Ascertainment of the Progress of Business: When a proprietor prepares financial statements evey year, he will be in a position to compare the statements. This will enable him to ascertain the growth of his business. Thus book keeping enables a long range planning of business activities besides satisfying the short term objective of calculation of annual profits or losses.

vi. Calculation of Dues : For certain transactions payments may be made later. Therefore, the businessman has to know how much he has to pay others.

vii. Control over Assets: In the course of business, the proprietor acquires various assets like building, machines, furnitures, etc. He has to keep a check over them and find out their values year after year.

viii. Control over Borrowings: Many businessmen borrow from banks and other sources. These loans are repayable. Just as he must have a control over assets, he should have control over liabilities.

ix. Identifying Do’s and Don’ts : Book keeping enables the proprietor to make an intelligent and periodic analysis of various aspects of the business such as purchases, sales, expenditures and
incomes. From such analysis, it will be possible to focus his attention on what should be done and what should not be done to enhance his profit earning capacity.

x. Fixing the Selling Price : In fixing the selling price, the businessmen have to consider many aspects of accounting information such as cost of production, cost of purchases and other expenses.
Accounting information is essential in determining selling prices.

xi. Taxation: Businessmen pay sales tax, income tax, etc. The tax authorities require them to submit their accounts. For this purpose, they have to maintain a record of all their business transactions.

xii. Management Decision-making: Planning, reviewing, revising, controlling and decision-making functions of the management are well aided by book-keeping records and reports.

xiii. Legal Requirements: Claims against and for the firm in relation to outsiders can be confirmed and established by producing the records as evidence in the court.

 Accounting

Book-keeping does not present a clear financial picture of the state of affairs of a business. When one has to make a judgement regarding the financial position of the firm, the information contained
in these books of accounts has to be analysed and interpreted. It iswith the purpose of giving such information that accounting came into being.

Accounting is considered as a system which collects and processes financial information of a business. These informations are reported to the users to enable them to make appropriate decisions.

Definition

American Accounting Association defines accounting as “the
process of identifying, measuring and communicating economic
information to permit informed judgements and decision by users of
the information”.