Definition and Objectives of Bookkeeping and Accounting Systems

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

(1) Accounting is an art

(2) record classify and summarize

(3) in terms of money

(4) transactions and events of a financial nature and

(5) interpret the results thereof

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 business results with the least amount of trouble. 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 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 find out 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 was earned during 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 collections and payments under the assumption that there are no credit transactions. If there is any credit transaction, it is 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, purely 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 does not provide control over posting accuracy or fraud protection because it does not provide any control over the recording of cash transactions. Therefore, it is termed as “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 dual 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 the amount that he has earned or lost.

The main objective of any business is to obtain the maximum possible profit with the minimum expense. Given 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 determine the result of business activities (whether profits or losses were made) for a year and to show the financial situation of the company on a certain date. The accounting has to comply with the requirements of the tax authorities; investors, government regulations; management and owners. This has resulted in broadening 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, the 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; sort into the desired categories and summarize the information to present it properly to interested people for their benefit.

Accounting Scope

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 be truly 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 so that they know exactly where they are. In addition, it is legally binding for some forms of business, such as limited companies, to periodically prepare statements in 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 no records are kept, it will be difficult to determine the exact net profit. In such circumstances, the tax authorities may overstate profits and thus a trader will suffer for not keeping business records.

(2) In the absence of proper business records, the merchant will find it difficult to present the actual position to the court in the event that he becomes insolvent.

(3) Proper record keeping helps the trader 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 trade dealings with previous references.