Definition and objectives of Bookkeeping
Accounting is defined as "the art of recording,
classifying and summarising in terms of money transactions and events of
financial character and interpreting the results thereof." In simplest words, we
can say :
(0) Accounting is an art...
(b) of recording classifying and
summarizing...
(c) in terms of
money...
(d) transactions and events of
financial nature and
(e) interpreting the results
thereof.
Accounting is an art of correctly
recording the day to day business transactions: It is a science of keeping the
business records in a regular and most systematic manner so as to know the
business results with minimum trouble. Therefore, it is said to be a statistical
procedure for the collection, classification and summarization of financial
information.
Objectives of Accounting
The objectives of accounting are
two-fold :
(i) To record permanently, all
business transactions, and
(ii) To show the effect of each
transaction and also the combined effect of all such transactions for a given
period so as to find out the profit the business has earned or loss incurred,
and also to know the correct financial position on a particular
date.
The necessity and importance of
accounting can be understood by answering the following questions :
(i) How much we have earned this
year ?
(ii) How much was earned during the
last year ?
(iii) Is our business
improving?
(iv) How much cash do we have?
(v) How much money we owe?
(vi) How much others owe to us ?
These questions are of decisive
importance for a trader and the answers can only be derived from up to-date
financial records. Only the system of keeping the perfect records of all
business transactions will help the proprietor to know the amount he has gained
or lost.
The main objective of any business
is to earn maximum possible profits with minimum expense. In view of this, a
commercial organization always tries to expand its business, increase its sales
and reduce operating expenses. The progress made in this regard, is always
indicated only by the properly maintained financial records.
Meaning of Accounting
In the beginning, the main
objective of accounting was to ascertain the result of the business activities
(whether profit has been earned or loss has been suffered) during a year and to
show the financial position of the business as on a particular date. Accounting
has to meet the requirements of taxation authorities; investors, government
regulations; management and owners. This has resulted in widening the scope of
accounting and may be defined as follows:
"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 result thereof."
Is Accounting a Science or an Art ?
In simple words, science
establishes relationship of cause and effect whereas the art is the application
of knowledge comprising of some accepted theories, principles and rules. Since
accounting docs not establish cause and effect relationship it only provides us
with the procedure by which objectives of accounting can be achieved, therefore
accounting is an art and not a science. Accounting is an art of recording
financial transactions in a set of books; classifying in desired categories and
summarizing the information for presentation in a suitable manner to the
concerned persons for their benefit.
Scope
of Accounting
The need of a system of
accounting was felt by man early in the history of trade and commerce. The art
of book-keeping is as old as the art of trading itself. This art of keeping
records passed through many phases since its inception. With the development of
commerce, it has attained a position of great importance. Indeed, it can be
truly said that accounting has become the foundation on which the whole fabric
of modem commerce rests.
Though there is no legal
obligation on an ordinary trader to keep the records, every business house finds
it essential and convenient to keep the systematic records so as to know where
exactly it stands. Moreover, it is legally binding on some forms of business,
such as joint stock companies, to prepare periodically, statements in proper
forms showing the position of the business. A proper and satisfactory method of
accounting is an essential part of any business house for the following reasons
:
(i) If no records are kept, it
will be difficult to find out accurate net profit. Under such circumstances, tax
authorities may overestimate the profits and thus a trader will suffer for not
having kept the business records.
(ii) In absence of proper business records,
the trader will find it difficult to submit the true position to the court in
case he becomes insolvent.
(iii) Keeping of proper records helps the trader
in framing future business plans & policies.
(iv) It will be difficult
to ascertain and fix the price of business to be sold or disposed off, if no
records are kept.
(v) Finally, in spite of the best memory it is beyond the
capacity of a trader to remember all the business dealings with back
references.
