Discuss any four needs of accounting
Answers
Answer:
1. Complete and Systematic Record:
Accounting is based on generally accepted principles and a scientific way of presentation of business transactions in books of accounts. As such, accounting is a complete and systematic recording of all business transactions. The limitations of humans, that they can not keep all transactions in mind, is overcome by accounting because each and every business transaction can be recorded and analyzed through same.
2. Determination of Selling Price:
The main function of the management is decision making. Accounting helps and guides the management to take decisions in respect of determining selling price, deduction of cost, increase in sales etc.
3. Valuation of the Business:
In case of sale of business or conversion of one business into another, true and fair value of the business is calculated. Through accounting, the correct picture can be depicted in Balance Sheet and as such the purchase price can be determined. Balance Sheet shows the value of assets & liabilities of the business which can be used to calculate its net worth.
4. Helps in Raising Loan:
For further expansion, business must have sufficient funds. Sometimes, due to paucity of funds business cannot do well. In those cases further funds can be raised by taking loan from some financial institutions like banks, IDBI, ICICI etc. These financial institutions lend money on the basis of profitability and soundness of the business enterprise. The profitability and soundness can be measured by the Trading and Profit & Loss Account and Balance Sheet, the final results of books of accounts.
5. Evidence in Court of Law:
The business transactions are recorded in the books of accounts supported by authenticated documents viz. vouchers etc. Thus, the accounts can be used as an evidence in the court of law.
6. In Compliance of Law:
Every business has to deal with various government departments like income tax, sales tax, custom and excise etc. Various periodic returns are to be filed with these departments. Accounting helps in preparation and filing of such returns.
7. Inter-Firm or Intra-Firm Comparison:
Explanation:
Trading and Profit & Loss Account shows net profit earned or net loss sustained by the business. If the accounts are maintained properly, records relating to various expenses, sales, gross profit and net profit etc. can be compared.
As such, accounting helps in inter- firm and intra-firm comparison. Comparison of accounts of two different enterprises for the same year is known as inter-firm comparison and comparison of two different periods for the same business enterprise is known as intra-firm comparison. The performance of the business enterprise is then compared with the predetermined goals and shortcomings, if any, can be rectified accordingly.
8. Facilitates Audit:
Depending upon the size, nature and type of business, certification of books of accounts, known as audit, is mandatory. Audit certificate issued by the auditor on the accounts is a clean chit to organization which proves that there are no irregularities in the organization.
9. Effective Management:
Accounting facilitates proper feed back to the management. As such, it helps the management in planning as well as control of different activities of the business enterprise. It also helps the management to evaluate the performance of the business enterprise and takes timely action to remove the shortcomings in the management.