The basic aim of proper bookkeeping and accounting is to ascertain profit or loss for the accounting period. In an accounting period, there may be numerous financial transactions for a business. Without a proper method for recording transactions, it is not possible to remember the various financial receipts and payments that took place during a period of time. The essential idea behind maintaining records is to show accurate positions with respect to each head of income and expense. A business may sell goods on credit as well as in cash. When the goods are sold on credit, a record must be kept for the person owing money. The owner of the business may like to know, from time to time, what amount is due on credit.
Likewise, a business makes several payments on account of various expenses at regular intervals. At the end of the accounting period, the owner will want to know how much profit has been earned or loss has been incurred over the period. For this, a lot of information is needed which can be gathered from a proper record of transactions. Therefore, bookkeeping, the proper maintenance of books of accounts, is indispensable to all businesses.
The main objectives of bookkeeping are;
1. To have a permanent record of each transaction of the business and to show its financial effect on the business.
2. To ascertain the combined effect of all transactions made during an accounting period upon the financial position of the business as a whole.
Secondary objectives of accounting include providing of reliable information about:
• changes in financial position resulting from the income-producing efforts of an enterprise;
• earnings of an enterprise, presented in a manner that emphasises sources and trends of earnings;
• economic resources and obligations of an enterprise;
• change in net financial resources which result from the financial and investment activities of an enterprise; and,
• any additional information, in the form of disclosures, which is relevant to statement users in assessing a particular enterprise’s prospects.
Similarly, modern accounting possesses the following basic characteristics:
Accounting involves recording economic activities which accompany the complexity and uncertainty of business. Therefore, while preparing timely accounting statements, estimates and professional judgements must be made.
Accounting statements are prepared on (a) cash basis of accounting, which recognises an event as a transaction only when cash is received or paid, or (b) accrual basis of accounting, which recognises revenues earned and expenses incurred as transactions.
Accounting is historical in nature- it is the recording of past happenings.
Advantages of proper accounting and bookkeeping:
• It provides useful information for decision making.
• It mainly serves those persons who have limited ability, authority, or resources to obtain financial information and have to rely on an entity’s financial statements to know about that entity’s operations;
• It provides valuable information to creditors or investors for forecasting, comparing and assessing potential cash flows with respect to timings, amount, and associated uncertainty.
• It supplies useful information in assessing the management’s capacity to spend business resources more effectively in achieving their primary business goals.
• It provides factual and explanatory information about all financial transactions and other events which are useful for forecasting, assessing and comparing the company’s earning potential.
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