What Purpose Does Accounting Serve - An Analysis to Understand the Art of Bookkeeping!

The pure objective of an accountant would be to record all business transactions that are monetary in nature, in order to ascertain if the company has earned profit or suffered loss during a financial year. The financial position of the company as on a particular date can thus be understood from the accounting journals and ledgers. We are talking about the conventional purpose of accounting. But with the lapse of time, more and more is being expected from accounting, in that, it has to meet the demands and requirements of tax authorities for the purpose of income tax and sales tax returns, government regulations, investors,owners and the management. Thus it can be aptly defined as the art of recording, classifying and summarizing events in a significant manner, that involve money transactions and/ or events that are of financial character, for interpretation.

Systematic records for future reference:

Book keeping is an accounting practice that tells us how to keep a record of financial transactions. A firm deals with its customers and suppliers, where numerous business transactions take place even every day. Is it possible for us to remember every transaction, which we might need it for our reference at a future date.Especially, if it happens to be a credit sale, definitely the necessity of systematic book keeping arises. The owner would like to know, what amount is due from whom, from time to time.

To know the financial position of the firm:

Every merchant is in business to earn profits. So systematic recording of factual and financial information will facilitate the owner to understand where he stands financially at the end of a financial year, what is his net profit and to pull the ropes tight if credit margin is wide. Further more, he can also understand the nature of his business growth by comparing the accounting records of two consecutive years.

Taxation purposes:

Some people evade tax, but no one can avoid tax. The main source of revenue generation for government is tax payments from business merchants and corporate companies. You need to pay a percentage as tax, in accordance with profit arising from sales. The accounting records that you maintain contain facts that are taken into account by the taxation authorities as a basis for assessment.

Good evidence in the court of law:

To prove your genuinity, in case of some disputes between yourself and the customer or supplier, your records and vouchers, if authentic and valid, are going to speak for you in the court of law as solid evidence.

Accounting also answers some of these questions: 

• How well the different departments of business have performed all along?
• What is the most profitable product line?
• What are the products whose production has to be increase and what is to be stopped in order to avoid losses?
• Is the cost of production reasonable or excessive?
• Is there a need to revise policy decisions to improve the profitability?
• What will be the future plans of business in the wake of existing results presented to the management?
• Overall, is the firm proceeding towards the right direction in terms of productivity, profitability and growth?