In today's world of ours every activity is with
some motive, i.e. purpose. In most of the cases. The purpose is to earn profit
while in other cases the purpose may be social welfare, providing education,
healthcare, etc. Whatever may be the purpose the activity is likely to be an
organized affair. Every organization has to use resources-material, labor,
services, capital and to work effectively the people in the organization require
information.
Money must be spent carefully.
If a person spends carelessly, a day would come when he will be left with no
money. Same can be said about a business. A business receives money from
different sources like sale of goods, sale of assets, receipt of various incomes
like rent, interest, commission etc. It has to spend money on items like
expenses, purchases etc. A business man should manage his business in such a way
that he should receive more than he spends, other wise he will be in trouble
because he will have to meet out expenses from the original amount invested by
him for starting business. Thus capital of the business will be reduced due to
this loss. If this process is allowed to continue for a long time then the whole
capital of the business will be washed away. If the businessman manages his
affairs in an efficient way and if receipts are more than the payments year
after year it prospers and grows in size.
So, it can be said that profit
increases the capital and loss reduces it. It should be kept in mind that profit
or loss is the result of cost of goods sold and sales. In actual practice, if a
business is to be run at profit then it has to sell goods at such a price as
will enable him to meet out not only expense on account of cost of goods sold
but also other expenses like, rent, salary, interest, insurance etc. Thus for
making a profit either sales should be kept sufficiently high to meet out all
expenses or expenses should be kept low so that they are fully met out of sales.
Besides it, business also maintains certain properties i.e. furniture, building,
machinery, equipment etc. Similarly, it also borrows money from time to time. In
order to keep property in good condition, to pay back in time the debts, to keep
down expenses, and to increase sales it is necessary to keep a constant watch, it is necessary that the proprietor of the
business is kept well informed of the behavior of these items.
With a view to supply such
information the art of accounting was developed. It supplies the following
information to traders :
(i) How much will be the total
earnings during the period;
(ii) What will be the expenditure during the
period on salaries, wages, lighting, insurance, rates and taxes etc;
(iii)
How much will be the profit or loss;
(iv) How much will be the capital and
causes of its increase or decrease;
(v) Nature and value of assets possessed
by the business;
(vi) Nature and amount of liabilities;
(vii) Customers
who owe to the business and the amount in each case;
(viii) Suppliers to
whom the business has to make payments and the amount in each case; and
(ix)
Other facts for filing sales tax or income tax returns.
