Question

Discuss the need and relevance of accounting.

Answer 1

1. Replacement of Memory: Since human memory is limited, no businessman can recall all business dealings. Accounting ensures that every transaction is recorded systematically, thereby overcoming the shortcomings of human memory.
2. Settlement of Tax Liability: When accounts are maintained as per accounting principles, it becomes easier to compute income tax and other taxes payable by the business.
3. Legal Evidence: Properly maintained accounts are accepted as documentary proof in courts. For example, if a businessman seeks to be declared insolvent, he must submit his accounts to the court.
4. Sale of Business: If a businessman wants to sell his enterprise, properly prepared accounts help in deciding its fair value. Without such records, the correct worth of the business may not be ascertained.
5. Realisation of Debts: Accounting supports a businessman in collecting money from debtors. The accounts act as evidence of debt and can be used to enforce claims in a court of law.
6. Raising Loans: For obtaining loans from banks or financial institutions, firms must provide financial statements. Lenders carefully evaluate these accounts before approving loans.
7. Comparative Study: A systematic record of accounts allows comparison between current results and those of earlier years, highlighting reasons for change. It also helps compare one firm’s performance with others in the same industry.
8. Assistance to Management: Accounting provides valuable financial data that assists management in planning, making decisions, and controlling business operations. For instance, a Cash Flow Statement helps in estimating future receipts and payments, ensuring efficient use of funds and better control over costs and assets.