Need for Accounting in Business

Let us start our discussion with the help of a case study. Mr. X wants to start a business. He decided to set up a departmental store. He has $10 million with him which he can invest in the business. In addition to the cash he also has a plot of land worth $2 million. He also brings in furniture worth $20 thousands. Now as he has gathered all his sources the next step is to build a store on the plot of land. He spends $5 thosand on building the structure. Next he spends $4500 on electricity fittings in the store. As the basic struture is ready , he makes some purchaases of the commodities that he wants to sell in the store worth $ 2.5 million. He pays salaries of the staff, makes other expenses, sells goods and earns revenue.
At the end of one month he wants to know the position of cash and other assets with him. He wants to know how much he has spent and how much he has earned during the month. How much he owes to the creditors and how much his debtors owe to him. He has here and there noted some of the major transactions and left some to his memeory by thinking that he would recall all the things when needed. But as he started matching his roughly maintained records with the actual things in the store he just ended up in a lot of confusion.
Can you say what could be the reason for his confusion. The reason was in fact the lack of maintenance of proper records of the business. As the volume of present day business has increased tremendously, it is difficult or you can say rather impossible for us to memorize all the business transactions that occur daily in the course of our business. And in the absence of any reliable records its impossible for us to come to a conclusion about the results of our business.
The main purpose of entering into a business is to earn profits. Whether a business has earned profit or suffered a loss can be determined only if we keep an account of each and every business transaction. In accountancy the term transaction refers to a money transaction i.e. the transaction in which money is either given or received. From a small shop in a locality to a big corporate house, every business entity enters into a number of transactions during a day. It becomes difficult to remember each and every transaction. Apart from determining the profit earned or loss suffered during an accounting period, a business unit is also interested in knowing its sales, purchase,revenue, expenditure, incomes etc. It may also need to determine the value of its assets and liabilities. For example sales manager of a company would be interested in finding out the total sales of the company during an year so as to compare it with the previous year sales. A business man may be interested in finding out the value of accounts receivables as shown by the accounting books on a particular date. All this makes it necessary to keep a proper record of each and every financial transaction in a systemetic and uniform manner.
This is here that ACCOUNTING comes to our help. Now the question is what does the term Accounting precisely mean? The American Institute of Certified Public Accountants defines Accounting as”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 financial character, and interpreting the results thereof.”
Thus it is quite clear from the definition above that Accounting is the process of recording, classifying, summarizing and analyzing business transactions according to the set rules and principals.It records only money transactions.
The first step in the process of accounting is journalizing. In this process each transaction is entered into a book called Journal ( since the word Journal means daily, transactions are entered in the journal on a daily basis). After journalizing the next step is posting i.e. entering a transaction into ledger. After ledger we make trial balance and then final accounts. But this is not the end of accounting process. It further moves to the process of analyzing of business results as shown by our final accounts. The business results are then conveyed to the various interested groups i.e. shareholders. creditors, bankers, managers and the society at large.

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