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Home Introduction to Accounting Need and Importance of Accounting

Need and Importance of Accounting:

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We live in a world where people need things from the day they are born to the day that they die. Some of these "need" are physical needs, a need for goods of various sorts, food, clothing, shelter, and so on. Some of them are emotional "wants", a need for education, entertainment, or recreation. In satisfying such needs businessmen perform useful services to their fellow humans. In return they expect to earn a responsible reward for their efforts in the form of profits.

"Cut your coat according to your cloth" - so goes the saying. Even a king becomes a pauper, if he fails to exercise economy in has expenditures. In other words, every individual will have to plan his expenditure according to his income. Obviously the question arises - why is this planning necessary? The need for such planning arises as our wants or desires on needs for goods and services are unlimited, while the means, i.e. the income with which to buy such goods and services are limited. Where, however, goods and services are available free of cost, i.e. gifts of nature, such as air, water (not in cities) etc. there is no question of economy. But the necessity of economy is undeniable, where goods or services are not available free of cost and their supply is limited.

A proper ad fair planning of expenditures helps us to ensure proper use of our income. Of course it is true that the quantity of goods or money cannot be increase by making a proper planning. But certainly we can ensure most economic use of goods or money at our disposal.

Most of us do maintain some kind of a written record of our income and expenditure. The idea behind maintaining such record is to know the correct position regarding income and expenditure. The need for keeping a record of income and expenditure in a clear and systematic manner has given rise to the subject of "bookkeeping".

Some individuals do not recognize the necessity of keeping accounts of there day to day expenditure, since they spend their own income and are not required to account for it to any body. But such an idea is wrong. A family, however, small it may be, must exercise proper control over its expenditures as to ensure future security. A family has two-fold responsibilities - one is that of ensuring all round welfare of the family and the other is the social responsibility. Needless to say, money is the most essential pre-request for ensuring peace and happiness of a family, which each and every member desires. The quantum of money must be adequate in relation to the needs. But mere adequacy of money will not do; one has to take care of its proper utilization. For this it would be necessary to exercise economy and maintain proper books of accounts. On the other hand each and every family must save a portion of its income for future contingencies. It is possible to increase the amount of savings through proper management and effective control of the family expenses. Through such saving the family helps materializing the economic planning of the country.

It is all the more necessary for an organization or a concern to keep proper accounts. At the end of the year the true result of the economic activities of a concern must be made available otherwise it will not be possible to run the concern. In case of a business concern the profit or loss at the end of a year must be ascertained, because, the amount of profit must be adequate in relation to that of investment made in the business. If it is not so or if there is a loss, it is an indication of some defects existing somewhere in the management of the business. All such defects need to be detected and analyzed and appropriate measures taken for their rectification. But it is only possible, if proper books of accounts are maintained in the business concern. So, the importance of bookkeeping to a business is the same as that of fresh air to a man to exist. Without bookkeeping records a business would meet death, through not instantly, but in a short time.

Moreover, if proper books of accounts are not kept in a business, the amount of profit cannot be ascertained and it will not be possible to distribute the profit among the owners of the business. The income tax dues to the government cannot also be paid. In the absence of books of accounts misuse or defalcation of money will remain undetected. The owner and other parties interested will not be able to have any information about the condition of the business. For the same reason in the case of non-trading concerns like schools, clubs, colleges, universities, hospitals etc. the need for accounting is universally recognized.

Thus we see that the necessity of keeping accounts is not only confined to business concerns but it is also useful for all classes and grades of people and organizations.

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More study material from this topic:

Need and importance of accounting
Accounting as a business language
Bookkeeping versus accounting
Branches of accounting
Objects of accounting
Important accounting terms and concepts
Accounting principles
Accounting concepts
Accounting conventions
Questions and answers



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