NEED
FOR ACCOUNTING
The
basic aim of doing business is to earn profit, which means that every person
doing business is interested to know about his trading results {Profit/ Loss}
and his financial position {Assets and Liabilities} at a given point of time.
It is not only the owner of the business but also the other stakeholders in the
business like the creditors, bank, government, etc. are also interested to know
the results of the business. It is only through accounting that these questions
be answered. For this very purpose Accounting is known as the “Language of
Business”. It is accounting which communicates various details about the
financial transactions of the business to the interested parties. At this point
it is important to note that accounting is not needed by business only but by
anyone who receives money from any source and spends the money so received for
any purpose, i.e. Individuals, Government, Local bodies, Non profit Organizations,
etc.
EVOLUTION
OF ACCOUNTING:-
Accounting
is the result of the introduction of money in business. As before money existed
it was a direct barter trade which meant that there was no credit transaction
so no need to maintain records and due to lack of standard measure of value it
was impossible to maintain any such records or to interpret them even if they
were maintained. As soon as money was accepted as a common means of exchange it
gave birth to credit transactions which in turn aroused the need to maintain
the records so that the businessman can see how much he owns and how much he
owes. As the commercial activities increased it led to increase in the
commercial organization which led to a great increase in the number and amount
of credit transactions. This increased the need and importance to maintain some
formal records of all the business transactions.
As soon as man started maintaining
the book of book-keeping the need for accuracy in its maintenance arised which
resulted in the development of double entry system of accounting. Book-keeping
upon double entry system can be traced back to the very early age of 15th
Century, when an Italian Monk named Lacu Pacioli’s work on double entry system
of accounting was published in Venice in 1494 B.C. Lacu Pacioli is also called
as the “Father of Accounting and Book-Keeping”. The author described this work
as the complete and accurate system of maintaining book-keeping records.
MEANING
AND DEFINITION OF ACCOUNTING:-
The
dictionary meaning of book-keeping is, “An art of keeping accounts in a regular
and systematic manner.”
According
to the committee on accounting terminology of American Institute of Certified
Public Accountants, “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.”
In
simple words accounting can be defined as an, “Art of Identifying, Measuring, Recording, Classifying, Summarizing,
Analyzing, Interpreting and Communicating
the financial information of the business to the users of such information.”
In abbreviation accounting is {IM RC SAI C}
Book-
Keeping
Book
–Keeping is an activity concerned with the recording of the financial data
relating to business operations in a significant and orderly manner. It covers
procedural aspects of accounting and embraces record keeping function.
Book-keeping procedures are governed by the final output of book-keeping, i.e.
the financial statements. In India financial statements would include trading
and profit & loss account and balance sheet. As we know that Profit and
Loss account gives the financial result of the business for the given period
and the balance sheet shows the financial position as on a given date.
From
business point of view the main purpose of book-keeping is to show correct
position of each head of income, expenditure, assets and liabilities. As every transaction
that takes place in business needs to be recorded so as to get the true and
fair view of the business every time it is needed.
ADVANTAGES
OF ACCOUNTING
1. Systematic Record:-
Innumerable transactions take place in a business . Accounting maintains a
systematic record of all such transactions.
2. Ascertainment of Profit:-
When business maintains a systematic record of all its transactions it has a
detailed record of its incomes and expenses. Hence it can easily ascertain its
profit/loss for any given period.
3. Enables Comparison:-
When business has its financial records over a period of time it helps it to
compare its performance and study its progress.
4. Ascertain Financial position:-
Accounting not only helps to ascertain profits but is also keeps records of
what company owns (assets) and what company owes (liabilities). This helps the business to ascertain its
financial position by preparing Balance Sheet.
5. Enables detection of frauds:-
Accounting records helps the business to detect frauds, if any have taken place
in the business. Based on this business can take necessary steps to stop
reoccurrence of such frauds.
6. Control:-
Accounting records helps business to keep a proper control on all its assets
and activities. For this very purpose accounting records are called as the
“eyes and ears” of business.
7.
Enables
Managerial functions:- Accounting records and reports
forms the bases for planning, controlling and decision making activities of the
management.
LIMITATIONS OF
ACCOUNTING
1.
Historical
in Nature:- The information provided by the accounting
reports are for the past year which means that they are out dated and would not
form the actual base for the calculation of future profits. Profit and loss
account shows profit for the past year and balance sheet shows the business
position as on the date which has already past.
2.
Lacks
details:- Financial records shows only the trading results
and not the manner in which such results have been obtained, i.e. it lacks the
details about the profit/loss by each product or service individually but
reveals only the overall profit of the business. For management as well as the
other users of accounting information only the overall information is not
enough as they expect to know the detailed performance of the business.
3.
Ignores
non-monetary information:- Accounting deals with only those
events and transactions which can be measured in terms of money. However as a
business there are a lot of other factors which are very important for the
survival and success of the business and they cannot be measured in terms of
money such as the loyalty of the employees, efficiency, technical innovations,
etc.
4.
Cost Centered:- The balance sheet is prepared based on the cost of
the assets owned by the business and not
at their market values which may be of great importance to the
management and the owners of the business.
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