Definition and objectives of bookkeeping and accounting systems
Accounting is defined as “the art of recording, classifying and summarizing in terms of monetary transactions and financial events and interpreting the results thereof.” In the simplest words, we can say:
(1) Accounting is an art
(2) of record classifying and summarizing
(3) in terms of money
(4) transactions and events of a financial nature and
(5) interpret the results of the same
Accounting is an art of correctly recording daily business transactions: it is a science of keeping business records in the most regular and systematic way to know business results with the minimum of hassle. Therefore, it is said to be a statistical procedure for the collection, classification and summary of financial information.
Accounting objectives
The objectives of accounting are twofold:
(1) To permanently record, all business transactions, and
(2) To show the effect of each transaction and also the combined effect of all those transactions for a given period to find out the profit that the company has made or the loss incurred, and also to know the correct financial position on a particular date . .
The need and importance of accounting can be understood by answering the following questions:
(1) How much have we earned this year?
(2) How much did you earn in the last year?
(3) Is our business improving?
(4) How much cash do we have?
(5) How much money do we owe?
(6) How much do others owe us?
Accounting systems
There are several accounting systems for keeping business records:
Cash accounting system
This system records only cash receipts and payments assuming there are no credit transactions. If there is any credit transaction, it is not recorded until the cash is paid or received. Account for collections and payments in the case of clubs, societies, hospitals, educational institutes, lawyers, etc. it is the best example of a cash system.
Single entry system
This system ignores the double aspect of each transaction as considered in the double entry system. In the single entry system, the merely personal aspects of the transaction are recorded, that is, the personal accounts. This method does not take note of the impersonal aspects of transactions other than cash. It does not offer any verification of the accuracy of the posting and no protection against fraud because it does not provide any verification on the record of cash transactions. Therefore, it is called “imperfect accounting.”
Dual Entry System
The double entry system was first developed by Luca Pacioliin, who was a Franciscan monk from Italy. Over time, the system has gone through many stages of development. It is the only method that meets all the objectives of systematic accounting. Recognize the double aspect of every business transaction.
These questions are of critical importance to a trader and the answers can only be derived from up-to-date financial records. Only the system of keeping perfect records of all business transactions will help the owner to know how much he has won or lost.
The main objective of any business is to obtain the maximum possible benefits with the minimum expense. In view of this, a business organization always tries to expand its business, increase its sales, and reduce operating expenses. Progress made in this regard is always indicated only by properly maintained financial records.
Accounting meaning
In the beginning, the main objective of accounting was to know the result of business activities (whether profits have been made or losses have been incurred) during a year and to show the financial situation of the company on a certain date. The accounting must comply with the requirements of the tax authorities; investors, government regulations; management and owners. This has resulted in the broadening of the scope of accounting and can be defined as follows:
“Accounting is the art of recording, classifying and summarizing, in a meaningful way and in terms of transactions and monetary events that are, at least in part, of a financial nature and interpreting the result thereof.”
Is accounting a science or an art?
In simple words, science establishes a cause and effect relationship, while art is the application of knowledge that comprises some accepted theories, principles, and rules. Since accounting does not establish a cause and effect relationship, it only provides us with the procedure by which the objectives of accounting can be achieved, so accounting is an art and not a science. Accounting is an art of recording financial transactions in a set of books; classify into desired categories and summarize the information to present it appropriately to interested people for their benefit.
Scope of accounting
Man felt the need for an accounting system early in the history of commerce and trade. The art of accounting is as old as the art of commerce itself. This art of record keeping went through many phases from its inception. With the development of trade, it has reached a position of great importance. In fact, it can be said with certainty that accounting has become the foundation on which the entire fabric of modern commerce rests.
Although there is no legal obligation for an ordinary merchant to keep records, every business house considers it essential and desirable to keep systematic records to know exactly where you are. In addition, it is legally binding for some forms of business, such as joint stock companies, to periodically prepare statements in the appropriate forms that show the position of the company. A suitable and satisfactory method of accounting is an essential part of any business house for the following reasons:
(1) If no records are kept, it will be difficult to find an accurate net profit. In such circumstances, the tax authorities may overestimate profits and therefore a trader will suffer for not keeping business records.
(2) In the absence of proper business records, it will be difficult for the merchant to present the true position to the court in the event of becoming insolvent.
(3) Keeping proper records helps the trader frame future business plans and policies.
(4) It will be difficult to determine and price the business to be sold or eliminated if records are not kept.
(5) Finally, despite the best memory, it is beyond the ability of a trader to remember all business transactions with previous references.