Book-Keeping and Accountancy · Ch 1 — Introduction to Book-Keeping and Accountancy

Objectives and Importance of Book-Keeping and Accounting

Book-keeping and accounting are not maintained out of habit — every business keeps them for a set of clear, practical reasons.

Objectives

To keep a permanent, systematic record of every financial transaction, so that nothing depends on memory.
To ascertain the profit or loss made by the business over a given period, through the Trading and Profit and Loss Account.
To ascertain the financial position of the business — what it owns (assets) and what it owes (liabilities) — on a given date, through the Balance Sheet.
To provide information to various interested parties — owners, management, creditors, banks, government, and others — so that they can take informed decisions.
To detect and prevent errors and frauds, since a systematic, dated record makes it much harder for a mistake or a dishonest entry to go unnoticed.
To facilitate comparison — of one year's results with another, or of one department's performance with another.
To provide legal evidence, since properly maintained books of account can be produced as evidence in a court of law or before tax authorities.
To satisfy statutory and tax requirements — every business is legally required to maintain proper accounting records for income-tax, GST, and (for companies) company-law purposes.

Importance / Need

Human memory is short and unreliable for the large volume of transactions a business enters into — a written, systematic record removes the need to depend on memory.
It provides the factual basis on which management takes day-to-day and long-term decisions — pricing, expansion, cutting costs, and so on. …