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It is impossible for the business or the management of the enterprise to memorize all the business transactions, so it is necessary that business transactions must be recorded in the books of accounts with their documentary proof. The proper accounting of these transactions will enable the business to evaluate its performance by preparing income and position statements. The accounting records can also be used as evidence in the court of Jaw. The management can also decide its future line of action and make· effective plans on the basis of facts supplied by accounting. The purpose of accounting is summarized as under:

 

  1. Maintaining proper record of business transaction. The main purpose of accounting is to identify business transactions of financial nature and enter them into appropriate books of accounts. Business transactions are classified as, assets, liabilities, capital, revenues, expenses and accordingly passed through books. The accounting records should be made properly and systematically, so that requisite information may be obtained at a glance from the books of accounts.

 

  1. Calculation of profit or loss. One of the main objects of accounting is to calculate the profit or loss of the business. Income statements are prepared with the help of trial balance (prepared with the balances of ledger accounts). At the end of accounting period, we prepare Trading Account and ascertain gross profit or gross loss. Afterwards Profit and Loss Account is prepared to calculate net profit or net loos. Accounting in this way, is the source to evaluate the performance of the business in terms of profit.

 

  1. Depiction of the financial position. At the end of accounting period, we prepare position statement. The value of assets and liabilities are depicted in the balance sheet, also known as position statement. The assets side of the balance sheet shows the position of various assets such as cash in hand, cash at bank, sundry debtor s, closing stock, building, machinery, furniture, etc. The liabilities side shows creditors’ claim as creditors’ for goods, bills payable, loans, outstanding expenses and proprietor’s claim as capital, net profit and reserves. Balance Sheet is said to be a mirror, reflecting the true position of assets and liabilities on a particular date.

 

  1. Providing effective control over the business. Accounting reveals the actual performance of the business in terms of production, sales, profit, loss, and cost of production and the book value of sundry assets. The actual performance can be compared with the planned or desired performance of the business. It can also be compared with the previous performance. Comparison reveals deviation in terms of weaknesses and plus points. Causes responsible for the poor performance are identified and efforts are made to remove them. Causes responsible for better performance are reinforced. Accounting, in this way, enables the management to adopt effective control over the business.

 

  1. Making information available to various groups. Business these days institution. In addition to the owners of the business various groups, such as, creditors, lenders, investors, researchers, government and even workers and consumers have an interest in the performance of business. Accounting makes information available to all these interested parties. Proprietors have interest in the profit or dividend. Debenture holders, lenders and investors are concerned with the safety of money advanced by them to the business and interest thereon. Financial soundness of the business makes their loans secured. Employees have an interest in their increased wages and bonus. The object of the accounting is to provide meaningful information to all these interested groups.