Unit-2 Nature and Scope of Accounting

This unit elaborates the need for accounting and then discusses the nature, scope and importance of accounting.

Outline the need for accounting and briefly describe the objects of accounting.

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Learning Pundits Content Team

Written on Apr 17, 2019 2:14:47 PM

  • It is not possible for the businessman to sit at the cash counter throughout the day.
  • As the size of the business grows, it becomes necessary to employ people to assist the businessman.
  • In such cases. theft of goods or cash is possible or all the sale proceeds may not be put into the cash box.
  • Hence, it becomes necessary to maintain accounting records for the purpose of control, especially when outsiders are employed.
  • It can, thus, be seen that there is need for proper accounting records even in case of a sole proprietorship concern.
  • In case of a partnership firm, all the partners may or may not be actively participating in the day-to-day management of the business.
  • It is, therefore, necessary to record all the transactions in order to satisfy all the partners. In case of a company, it is not possible for the owners (shareholders) who are too large in number to take part in the day-to-day management of the company.
  • Generally, the management of the company is entrusted to paid managers. Hence, the need for recording all transactions.
  • üInformation about the business is required for both internal and external use.
  • For example, the management needs a lot of information (for their internal use) for planning, controlling and evaluating the operations of the business.
  • üInformation is also needed by some outsiders, banks, creditors, etc. For example, it is required for filing sales tax, income tax, and other tax returns with appropriate tax authorities.
  • When a firm approaches the bank for loan or the creditors for supply of goods on credit, the bank or creditors like to know the firm's financial position (whether it is financially sound or not) and its profit earning capacity.
  • Accounting is necessary in not only business organizations, but also 'non-business' organizations like schools, colleges, hospitals, libraries, etc.

Objectives of accounting are:

  • To keep systematic records: Accounting is done to keep a systematic record of financial transactions, like purchase of goods, sale of goods, cash receipts and cash payments. Systematic record of various assets and liabilities of the business is also to be maintained.
  • To ascertain the net effect of the business operations i.e., profit or loss of business: We know that the primary objective of business is to make profit and the businessman is very much interested in knowing the same. A proper record of income and expenses facilitates the preparation of the profit and loss account (income statement). The profit and loss account reveals the profit earned or loss incurred by the business firm during a particular period.
  • To ascertain the financial position of the business: The businessman is not only interested in knowing the operating result, but also interested in knowing the financial position of his business i.e., where it stands. In other words, he wants to know what the business owes to others and what it owns, and what happened to his capital-whether the capital has increased or decreased or remained constant. A systematic record of various assets and Nature and Scope of Accounting liabilities states the preparation of a statement known as balance sheet (position statement) which answers these questions.
  • To provide accounting information to interested parties: Apart from the owners, there are various other parties who are interested in knowing about the business firm, such as the management, the bank, the creditors, the tax authorities, etc. For this purpose, the accounting system has to supply the required information.