The main purpose of maintaining a set of accounting books is to enable the person concerned to get information about the financial position and conduct of his business as and when he needs it. Every businessman makes a large number of financial transactions in the course of his business. It is virtually impossible for him to remember each and every detail of all these transactions. Yet each of them affects his business in some way or another. Accounting provides him with the information that can enable him see the individual effect of each transaction and the collective effect of all the transactions made in a particular period.
Advantages of accounting
Some common advantages of accounting are discussed below:
Information about financial position
Perhaps the most obvious advantage is the fact that accounting keeps a businessman informed about the financial position of his business. He is able to know almost every necessary detail of the financial affairs of his business simply by going through his accounting records.
Ascertainment of profit or loss during a period
Accounting records assist a businessman in accurately calculating his profit or loss over a particular period. For a person who depends solely on his business for his daily bread, it is very important that he should know the exact amount of his profit for a particular month so that his drawings from the business in that month do no exceed his profit. Profit is the sole motive of most businessmen and it is imperative that they should be well informed of how they are doing towards achieving this objective.
Accounting provides better control
By making available information on movement of his assets, accounting helps a businessman exercise an effective control over both his assets and his employees. In the absence of accounting records it would be extremely difficult, if not impossible, for a businessman to notice theft or misappropriation of his cash, stock or other assets.
Accounting helps in decision making
Accounting records and statements help a businessman in taking decisions about his business like expansion, opening up a new branch, closing down a loss making department, etc. They also help him in drawing up his future plans.
Accounting records are evidence of acts
Accounting records often provide an evidence of a transaction. In certain cases, a businessman may be asked to prove that he performed a particular act (for example, paying for goods bought by him). If he is able to produce his accounting records showing that he did in fact perform that act, he may be saved the obligation of performing it again. Also, in the event of a dispute over any aspect of a transaction entered into by a businessman, accounting records prove useful in sorting out matters.
Accounting helps in obtaining loans for business
Accounting provides information about the financial position and worth of the business. This fact alone is necessary for a number of reasons. For example, no businessman can reasonably expect to be granted a loan or overdraft facility without producing evidence, in the form of accounting statements, of his financial health. Similarly should a businessman decide to sell his business the things that will help most in determination of the business unit’s worth undoubtedly be his accounting records.
Collection and payment of cash
Accounts are of particular importance to a trader who buys or sells goods on credit. He needs well kept, detailed accounts, for prompt recovery of his debts from his customers and for setting his dues to his suppliers.
Requirement for tax purpose
Accounts are necessary for income and other tax purposes. In absence of proper accounting records it would be extremely difficult to prove to the tax authorities the correct income on which the tax could be levied. Similarly, taxes like, sales tax, excise duty, etc. are collected on the basis of a businesses unit’s turnover. Hence, computation and proof of sales revenue is essential.