accounting definition

accounting definition

Importance of Accounting in Business

1. Introduction to Accounting

The purpose of management is to produce goods and services for private companies such as hospitals, schools, estates, and local, state, and federal governments. The concept, as expressed by “Accounting or keeping financial records is far from being only an extension of bookkeeping,” includes the formal design of recording, the design and formal procedure of quality control. Certain antiquities had applied the principles of bookkeeping to calculate cash balance, credit, sales, inventories, and the liabilities of the goods. Legal records of ancient battles held in India were maintained by the “Village” Accountants or in Tamil “Karnams,” whose duty was to collect revenue, calculate the salary, rice, and other benefits to be given to infantry, cavalry, court elephants, court curters, etc. Certain accountants known as “Royal Accountants” were appointed in all states of India to maintain secret accounts of the King’s property and possessions.

An accountant is a person who is skilled in the practice of accounting or is in charge of public or private accounts. Accountancy is the science and art of maintaining the records of all the financial transactions of a class. It is a conservative function designed to serve as an effective tool for the management of exchange wealth. In the modern business environment, management is often called the key to success in every organization. This is why managers at different levels perform the control function in the business. Without effective control, such a corporation cannot survive in the competitive business environment.

2. Benefits of Accounting

3. Financial Position: The financial position of the business at any time can easily be identified. This is done by summarized information given by the financial statement. The financial statements generally prepared are the income statement and position statement, which show the real position at the end of the financial period. In other words, the financial position gives a summary of resources and the obligations of the business.

2. Helpful in the Formulation of Policies: Accounting is very useful in the formulation of business policies. This is done by making a proper analysis of the financial data and the security of the company. In other words, the policies that will be made depend on the assumptions behind the accounting concepts.

1. Permanent Record: Accounting provides a permanent record of all business transactions. Permanent records are necessary to carry on the business activities in the future; therefore, it acts as evidence of the occurrence of a financial transaction.

The benefits and advantages of accounting have been found to be very useful not only to the business but also to people concerned about the business like the shareholders, investors, government, management, the workers of the company, the customers and even the general public. In order to know the problems of the business, different kind of accounting principles are needed to apply. The common advantages of accounting are as follows:

3. Key Principles of Accounting

Other principles include the principle of periodicity, the principle of prudence, the principle of materiality, and the principle of objectivity. There are other rules and guidelines that govern the art of recording transactions. These are ratio analysis rules (relevance and neutrality). These principles include checks and balances, measuring business activities, and communication. Checks and balances is the principle that the same person who can write a check should not be able to control the books. The principle of calculating business activities states that there is no other objective that can rival income production in business. The purpose of communication is to give the company’s wealth as well as readiness to spend funds. For the reason businesses record transactions, it is essential to have some general rules that make these recordings consistent. Since the rules which apply to each and every transaction are those of the individual transactions, a foundation of rules is first required. Once this foundation is established, the rules applying to each specific transaction are decided based on those rules.

Some of the key principles of accounting include but are not limited to: cost principle, full disclosure principle, going concern assumption, matching principle, materiality, monetary units, and consistency. The monetary unit principle states transactions should be recognized in a monetary unit such as United States currency. The economic entity principle states that the accountant should be able to reduce the financial report of an entity to those of the significant economic events within a particular entity. The continuity principle adjusts the going concern presumption at the time a serious condition of the company has been encountered.

4. Types of Accounting

(5) BOOKKEEPING: It is a simple, limited accounting system which includes only two aspects of the transaction. Entry and attention. They are recorded in a day book in the first phase of the operation. It involves the collection of transactions indicating the nature of the transaction and the quantity, weight, volume, or quantity of the items sold or purchased and the amount involved. At the end of a month the transactions are classified according to the nature of the financial transaction recorded. The totals to be used in the agenda and ledger accounts. The monthly totals can be entered directly from the day book into the ledger or the day book can be compiled in a monthly format, with debit and credit amounts for each transaction date.

When a person leaves home, he maintains a record of all his financial transactions with his parents. When he starts working, he maintains a record of all his financial transactions related to the business in which he works. In the same way, the businessman is also required to maintain an account of all his transactions. This rule applies to trading companies, corporations, limited liability companies and even professionals such as lawyers, doctors, engineers, and other service providers. The business community is subject to any business conducted by an individual or a group. There are two types of accounting, whether the business is large or small, whether the transactions are more or less.

5. Conclusion

Accounting information helps the proprietors of the business to have uniformity and perfection as per the principles of the business. Thus, it helps to avoid disputes between them and it leads to goodwill promotion in the business. Hence, it leads to business development as well. It gives information and answers to managerial problems and enables them to make decisions based on this information and also to assess the performance of the various parts of the business.

Accounting is instrumental within business as a method to measure financial activity. Whether private or public, every business aims to create profit. When accounting is performed correctly, the company recognizes in what areas they are generating profit or incurring losses. The accounting process is a group of sub-procedures functioning together to realize an accurate view of a business’ performance. Monetary information, that is, the summaries of the business’ transactions, is vital information for owners, managers, and investors to make knowledgeable decisions. Transaction documents, payroll records, economic transactions, and a lot of other monetary data systems are all essential to business.

If the account department of a business is not situated in a very good manner, it is clear that the business will not be able to operate their working activities in an automatic manner. Here, such type of activities which are related to the finance of the concern will be done in a coding manner. Then, in this situation, there will be an adverse effect on the profit, budget, and the work efficiency of the concern.