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Business Accounting: Meaning and Purposes

Updated on July 9, 2015
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IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

Today, business and related activities are become more significant. Even a common man can become a part of business or companies by just taking their shares. Any way many other sectors of the world participating in business activities including investors, employees, board of directors, other professionals, customers etc.

In theory, the major object for all such kind of economic activities is making profit, many persons are interesting or enthusiastic in knowing the result of their work. When we consider a modern business firm, they are actively interacting with many people. So, there occur many transactions between them economical and non- economical.

Accounting is the field of study which provides a systematic way to record the business transactions and showing the results of the business activities. Actually accounting claims a good heritage. There are many evidences for the practices of recording business transactions from the early time onwards. That practice is popularly known as ‘book keeping’. Because where only the transactions are just entered in a order. But accounting provides a systematic way for treating transactions.

Meaning and Definition of Accounting

The meaning of accounting can be said to be the way of recording of business transactions having economical in nature and by find out the result of business activities in nutshell or very briefly.

American Institute of Certified Public Accounts (AICPA) defines “ accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof”

Why Accounting?

In this section, you can learn what are the various objectives, functions and significance of accounting. When we are go through the definition given by American Institute of Certified Public Accounts (AICPA), which provides major objectives behind the accounting. Each of them is described separately as below.

Recording of Business Transactions

When we examine the activities of a business organization, where we can see two major types of transactions on the basis of their nature, they are economical and non-economical transactions. Book keeping an oldest method where the transactions are just entered in an chronological order. But in accounting not only just entering the transactions but also treating in a systematic manner on the basis of their chronological order. Journal is the first place to enter transactions, where the transactions are treated with putting a narration also. In journal entry each transaction are equally debited and credited.

Classification of Transaction or Journal Entries

When we analyze each of the business transaction, we can see some once are related to machinery, wages, rent, interest etc. So there is a requirement to classify each of them in to separate accounts. It is doing by creating Ledger accounts. Where we create separate accounts for each item like cash account, capital account, interest account, wages account etc.

Summarizing of Ledger Accounts

Surely, every business firms conducts many transactions related to cash, employees etc in an accounting year. Someone are earned and others are spent, some once creates liabilities etc. So we need to summarize each of the accounts. It can be find out by creating Ledger accounts. At the end of each financial year the balances of each account are carrying forwarded to next year. When we joined all the balance amounts together we can summarize the total credit amount and debit amount. For that we can create ‘Trial Balance’

Find out the Result of Business

Simply the ultimate goal of every business is to make profit forever. To find out profit or loss we have to close accounts at the end of each financial year. Anyhow to find out gross profit (or loss) of the business, we must prepare ‘Trading account’. Then to find out net profit (or loss) of business we should prepare ‘profit and loss accounts’.

Understand the Financial Position of the Business

The owners and other business related personalities are not only interested in know the current profit or loss but also wanted to know about the survival and future of business. For understanding the financial position of a business firm, they should prepare ‘Balance Sheet’. Balance Sheet is nothing which showing the total assets, liabilities and the capital of the business. Balance sheet enables the public to evaluate whether the business is in soundness or in weak.

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    • jahfar514 profile image

      JAHFAR PUTHAN PEEDIYEKKAL 2 years ago from CHEMMAD

      informative and useful hub

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      Larry Wall 4 years ago

      Your Hub is very informative. I use to work for a non-profit, and my CPA and I had many discussions. From an accounting standpoint, she had to deduct depreciation from the cash balance. This was for tax purposes. We paid no taxes. Thus I wanted to know each month how much cash was available. I have been arguing with CPAs over retained earnings for years and have yet to reach an agreement. I had a great CPA at my last job, and she is still there. However, the non-profit world does differ from the for-profit world and accountants have to be able to adjust their reports so that the client understands, and the records are accurate.