4. Role of Accounting

ROLE OF ACCOUNTING

For centuries, the role of accounting has been changing with the changes in economic development and increasing societal demands.

It describes and analyses a mass of data of an enterprise through measurement, classification and summarization, and reduces those date into reports and statements, which show the financial condition and results of operations of that enterprise. Hence, it is regarded as a language of business.

It also performs the service activity by providing quantitative financial information that helps the users in various ways.

Accounting as an information system collects and communicates economic information about an enterprise to a wide variety of interested parties. However, accounting information relates to the past transactions and is quantitative and financial in nature, it does not provide qualitative and non-financial information. These limitations of accounting must be kept in view while making use of the accounting information.

USERS OF ACCOUNTING INFORMATION

Owners:

The owners provide funds or capital for the organization. They possess curiosity in knowing whether the business is being conducted on sound lines or not, and whether the capital is being employed properly or not. Owners, being businessmen, always keep an eye on the returns from the investment. Comparing the accounts of various years helps in getting good pieces of information.

Management:

The management of the business is greatly interested in knowing the position of the firm. The accounts are the basis, the management can study the merits and demerits of the business activity. Thus, the management is interested in financial accounting to find whether the business carried on is profitable or not. The financial accounting is the “eyes and ears of management and facilitates in drawing future course of action, further expansion etc.”

Creditors:

Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that these groups are interested to know the financial soundness before granting credit. The progress and prosperity of the firm, two which credits are extended, are largely watched by creditors from the point of view of security and further credit. Profit and Loss Account and Balance Sheet are nerve centers to know the soundness of the firm.

Employees:

Payment of bonus depends upon the size of profit earned by the firm. The more important point is that the workers expect regular income for the bread. The demand for wage rise, bonus, better working conditions etc. depend upon the profitability of the firm and in turn depends upon financial position. For these reasons, this group is interested in accounting.

Investors:

The prospective investors, who want to invest their money in a firm, of course wish to see the progress and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This is to safeguard the investment. For this, this group is eager to go through the accounting which enables them to know the safety of investment.

Government:

Government keeps a close watch on the firms which yield good amount of profits. The state and central Governments are interested in the financial statements to know the earnings for the purpose of taxation. To compile national accounting is essential.

Consumers:

These groups are interested in getting the goods at reduced price. Therefore, they wish to know the establishment of a proper accounting control, which in turn will reduce to cost of production, in turn less price to be paid by the consumers.

Researchers are also interested in accounting for interpretation.

Research Scholars:

Accounting information, being a mirror of the financial performance of a business organization, is of immense value to the research scholar who wants to make a study into the financial operations of a particular firm as such study needs detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long-term liabilities and share-holders funds.

• The accounting system concerned only with the financial state of affairs and financial results of operations.
• It is the original form of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions.

MEANING AND DEFINITION OF BOOKKEEPING

Definition: “The art keeping permanent record of business transactions is book keeping.”
J. R. Batliboi: “book-keeping is an art of recording business dealings in a set of books”.
R. N. Carter: “Book-keeping is the science and art of correctly recording in the books of accounts, all those business transactions that results in transfer of money’s worth”.

FEATURES OF BOOK-KEEPING

• It is the process of recording business transactions.
• Monetary transactions are only recorded.
• Recording is made in given set of books of accounts.
• Record is prepared for a specific period but presented for future references.
• It is an art of recording business transactions scientifically.

DIFFERENCE B/W BOOK-KEEPING AND ACCOUNTING

BOOK-KEEPING

• The object of book-keeping is to prepare originalbooks of accounts, trial balance and to maintain systematic record of financial results.
• It has a limited scope.
• Level of work is restricted to clerical work