Definition and Objectives of Bookkeeping and Accounting Systems

Accounting is defined as “the art of recording, classifying and summarizing in terms of money transactions and events of a financial nature and interpreting the results thereof”. In simpler words, we can say:

(1) Accounting is an art

(2) to record classify and summarize

(3) in terms of money

(4) transactions and events of a financial nature and

(5) interpret their results

Accounting is an art of correctly recording day-to-day business transactions: it is a science of keeping business records in the most regular and systematic way so as to know the business results with the minimum of problems. Therefore, it is said that it is a statistical procedure for the collection, classification and summary of financial information.

Accounting Objectives

The objectives of accounting are two:

(1) Permanently record all business transactions, and

(2) To show the effect of each transaction and also the combined effect of all those transactions during a given period in order to find out the profit or loss incurred by the business, and also to know the correct financial position at a particular date.

The necessity and importance of accounting can be understood by answering the following questions:

(1) How much have we earned this year?

(2) How much was earned 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:

accounting cash system

This system records only cash receipts and payments under the assumption that there are no credit transactions. If there are any credit transactions, they are not recorded at all until the cash is actually paid or received. Collection and payment account in the case of clubs, societies, hospitals, educational institutes, lawyers, etc. it is the best example of cash system.

single entry system

This system ignores the double aspect of each transaction as it is considered in the double entry system. Under the single entry system, merely personal aspects of the transaction are recorded, that is, personal accounts. This method does not take note of the impersonal aspects of non-cash transactions. It offers no control over the accuracy of the posting or fraud protection because it does not provide any control over the recording of cash transactions. Therefore, it is termed as “imperfect accounting”.

Double 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 critically important 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 profit with the minimum expense. Given this, a commercial 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

Initially, the main purpose of accounting was to determine the result of business activities (whether profits or losses have been made) for a year and to show the financial situation of the company on a certain date. The accounting has to meet 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 monetary terms, transactions and 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 comprising 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, therefore accounting is an art and not a science. Accounting is an art of recording financial transactions in a set of books; classify in the desired categories and summarize the information to present it in an appropriate way to the interested people for their benefit.

Scope of Accounting

The need for an accounting system was felt by man early in the history of trade and commerce. The art of accounting is as old as the art of trading. This art of record keeping has gone through many phases since its inception. With the development of trade, it has reached a position of great importance. In fact, it can truly be said that accounting has become the foundation on which the entire fabric of modern commerce rests.

Although there is no legal obligation for an ordinary trader to keep records, every business house finds it essential and convenient to keep systematic records to know exactly where it is. In addition, it is legally binding on some forms of business, such as corporations, to periodically prepare statements on appropriate forms showing the position of the business. A proper and satisfactory accounting method is an essential part of any business house for the following reasons:

(1) If records are not kept, it will be difficult to determine the exact net benefit. In such circumstances, the tax authorities may overestimate profits and therefore a trader will suffer for not having kept business records.

(2) In the absence of proper business records, the trader will find it difficult to present the actual position to the court in case of bankruptcy.

(3) Proper record keeping helps the merchant to frame future business plans and policies.

(4) It will be difficult to determine and price businesses to be sold or disposed of if records are not kept.

(5) Finally, despite the best memory, it is beyond a trader’s ability to recall all business dealings with past references.