Accounting is a very important function for almost every business. Without accounting, it is very hard to run a business. In earlier times, accounting was maintained manually in registration, However, accounting is now done using different software on a computer, which makes it much easier to maintain compared to a manual system.
Table of Contents
What is Accounting ?
By the American Institute of Certified Public Accountants (Year 1961):
“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”.
By the American Accounting Association (Year 1966):
“The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of accounting”.
Meaning Of Accounting
Accounting is the process of systematically identifying, recording, classifying and summarising of financial transaction related to a business.
- Identifying: 1st we need to identify that, the transactions which occurred that is a personal transaction or business related transaction. Cause only business related transactions are recorded in accounting.
- Recording: The company’s management can’t remember all the business-related transactions so, they record transactions in a journal book. Recording in a journal happens in chronological order which means date-wise recording. Only monetary or financial transactions are recorded in the journal.
- Classifying: After recording of journal, we do ledger posting. In ledger there are so many different heads. all similar nature of transactions are put together under one head.
- Summarising: After classification we prepare a summery of that transactions data. In this process we prepare “Trial Balance” and “Financial Account”.
Trial Balance:
A trial balance is a financial report which shows, the closing balances of all the general ledger accounts. In trial balance there are 2columnsn. One is a debit column, and the other one is a credit column. All credit balances of ledger accounts are put in the credit column of the trial balance and all debit balances of the ledger accounts are put in the side of the debit column.
Financial Account:
The preparation of 2 different statements to find out the operating results and to know the financial position of the business is known as a financial account. 1st statement is trading and profit and loss account. It is also known, as an income statement and another statement is the balance sheet. It is also known as a positional statement.
Income Statement:
In the income statement, the company determines how much revenue is earned and losses incurred during the period. In the trading account, company puts all the direct expenses and losses and in the profit & loss account, company puts all the indirect expenses and losses. Through trading accounts, the company knows the gross profit and gross loss of the business. Whereas the profit & loss account company identifies the net profit and net loss of the business.
Positional Statement:
In a positional statement, the company knows the financial position of the business. There are 2 sides, one is an asset and another one is a liability. On the asset side, we put all the assets of the company like- current assets, non-current assets, investments, and intangible assets, and on the liability side, we put all the liabilities of the company like- current liabilities, long-term liabilities, and owner’s equity.
Why Accounting Is Important To The Business
Generally in a business, there are so many type of transactions. like- material purchase, worker's wages, packaging expenses, business house rent, electricity, etc. so it is impossible for management to remember all the transactions. that's why the concept of recording arise. In earlier time, recording process are done by manually but that creates so many difficulties like- wastage of time, more paper work, no proper calculations, etc. after that company use computer software for recording of business transactions and that's give more advantages to the business.
- Keeping record:
In accounting, a company record all his business transactions in the book of accounts. This record also works like evidence in legal matters. So keeping record is one of the important thing for a business. - Find out profit and loss:
Without accounting, it is hard to find out profit or loss of the business. In accounting, company prepare income statement in which we can find out gross profit or gross loss as well as net profit or net loss of the business. - Valuation of the business:
Accounting also helps to find out actual value of the business. In business an accountant prepare balance sheet or that also known as positional statement. In which, we can easily see that, how much amount of assets and liabilities a company holds then, we can calculate and find out value of the business. - Facilitates loans:
Bank/ financial institutions see the performance, growth and credit score of a business with the help of accounting and then they decide to grant the loan or not. - Helps in comparative study:
With the help of Accounting, management can compare their current year’s business transactions with their previous year’s business transactions. Also management can compare their business transactions and profit & loss with their competitors business transactions and profit and loss. - Tax Compliance:
Through the help of accounting, a company knows how much amount of profit they earned during that specific period (Financial Year) and in the basis of profit a company have to pay all of his taxes. - Others:
Helps in decision making.
Helps to prepare budget for future.
Helps businesses comply with financial laws and regulations.
Read More Blogs: