Objectives and role of accounting

Why keep accounts at all? There are four objectives.

• Keep a systematic record. Your memory is limited. Friends who go on a trip and write nothing down end up quarrelling in the car about who owes whom. Accounting replaces memory.
• Work out the profit or loss. Every owner wants to know: am I earning or losing? Profit = revenue − expenses. Revenue of ₹6,00,000 and expenses of ₹5,40,000 give a profit of ₹60,000.
• Show the financial position. The balance sheet, made at the end of the period, lists what the business owns (assets) and what it owes (liabilities).
• Give information to users, so the owner, managers, bank, suppliers and government can decide things.

Because records are kept, accounting also helps in practical ways. Managers can decide on a new branch or product. Tax can be worked out from the income. A bank gives a loan only after seeing a few years of records. The records can be shown as evidence in court. A business can be sold at a price based on what it is worth.

Accounting is called the language of business. People may speak Hindi, Marathi or Tamil, but a business tells its story in accounts. The book also describes accounting as a historical record of what happened, a measure of economic reality (what the business is really worth), an information system that collects and passes on data, and a commodity: a service people need and pay for, like a CA's.

Accounting has limitations too. It records only past, money facts. The skill of a good machine operator or the loyalty of staff cannot be put in the books. It also ignores the fact that ₹1 buys less today than five years ago. Some figures rest on the accountant's judgement, such as how much to write off for wear and tear. And figures can be dressed up to look better, which is called window dressing.