Principle of Accounting.doc - UNIT ONE INTRODUCTION AND...

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UNIT ONE INTRODUCTION AND DEFINITION OF ACCOUNTING 1.1 NEED FOR ACCOUNTING Accounting has rightly been termed as the language of business. The basic function of a language is to serve as a means of communication. Accounting also serves this function. It communicates the results of business operations to various parties who have some stake in the business, viz, the proprietor, creditors, investors, the government, and other agencies. Though accounting is generally associated with business, the government, housewives and other individuals also make use of it. For example, a housewife has to keep a record of the money received and spent by her during a particular period. She can record her receipts of money on one page of her ‘household dairy’, and payments for different items such as milk, food, clothing, education, etc. on some other page(s) of her diary in a chronological order. Such a record will help her in knowing about: i. The sources from which she received cash and purposes for which it was utilised. ii. Whether her receipts are more than her payments or vice versa. iii. The balance of cash in hand or deficit if any, at the end of a period. In case the housewife records her transactions regularly; she can collect valuable information about the nature of her receipts and payments. For example, she can find out the total amount spent by her during a year on different items, like milk, food, education, entertainment, etc. Similarly she can also find the sources of her receipts such as salary of her husband, rent from property, cash gifts from her close relatives, etc. thus, at the end of the year she can see for herself the status of her financial position i.e. what she owns and what she owes. This will help her to a great extent to plan her future income and expenses or in making out budget. The need for accounting is more felt for a person who is running a business. He must know: running a business, (i) what he owe, (ii) what he owns (iii) whether he has earned a profit or suffered a loss on account of running a business, (iv) what his financial position is, i.e. whether he will be able to meet all his commitments in the near future or is in the process of becoming a bankrupt. 1
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1.2 DEVELOPMENT OF ACCOUNTING Accounting is as old as money itself. In India, Chanakya in his Arthashastra has emphasised the existence and need of proper accounting and auditing. However, the modern system of accounting owes its origin to Pacoili who lived in Italy in the 18 th Century. In those early days, business organisations and their transactions were not so complex because they were small and easily manageable by the proprietor himself. Things have changed rapidly during the last fifty years. Industrial Revolution has resulted in large-scale production, cut-throat competition and widening of the authority and responsibility. Today there is a greater need for co-ordination and control. The old technique of management by intuition is no longer considered dependable in the situation in which the modern firm operates. Therefore, present accounting cannot be the same as it used to be about half a century ago. It has grown in
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