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Why Accounting is called as

Venkat Dosapati
11/10/2018 0 0

In this article, I am going to explain the accounting in layman terms. Hope you find it useful.

Just Observe the following activities.

  1. Mr.X Gets salary up on working as software employee of Google. Once salary has been credited he spends it for the purchase of goods and services, Children's education, Purchase of house etc. Don't you think Mr.X is performing the economic activity? The Answer is yes. He is playing the commercial operation by paying the consideration in the form of Money for acquiring them. Here the benefit is purely Individual.
  2. Have you heard of Hyderabad Metro Rail which recently began it services and well received by the people of Hyderabad. Whether the services rendered by the Hyderabad Metro Rail Limited to the passengers who travelled through it is an Economic Actvitity or not? The answer is Yes. Here in this economic benefit - Who benefitted? It is Public at large - It is a Social Benefit.
  3. So we can draw a concussion from the above two set of activities - Not all the economic activities are run for the individual economic benefit, such economic activity may create a social advantage too. 

So, How these Economic Activities are performed?

Economic Activities are performed through Transaction and Events. Let us understand what a Transaction and Event is.

The transaction is used to mean a Business / Performance of act / An agreement etc., While Event is used to denote a happening, as a consequence of operations, a result.

Let us understand the above two terms with an example.

Imagine Mr X has a business idea of starting a retail shop at the busy location of Hyderabad. He invests 10,00,000 for running a stationery business, and purchases goods worth 8,00,000 and sells for 9,50,000. He pays shop rent of 1,00,000 and finds that he has left goods worth of 1,00,000.

Mr X, In the above case, carries on Economic Activity. It is through some transactions and events. In the end, he eagers to know running a stationery business is profitable or not.

Sales : 9,50,000

Closing Stock : 1,00,000

Total : 10, 50 ,000

Purchases : 8,00,000

Shop Rent : 1,00,000

Total Expenses : 9,00,000

Surplus : 10,50,000-9,00,000 = 1,50,000

Now will see what the events and transactions in the above economic activity are?

1. Having a surplus of 1,50,000 & Closing stock of worth: 1,00,000 are events since they arise as a result of economic activity

2. Purchase of goods, Sale of assets, Investment of amount in the business, Paying shop rent are like Transactions.

Likewise, Every individual wants to keep a record of all transactions and events and to have adequate information to aid in decision making purpose [ Whether it is worth to run a business or not ].

Accounting has been developed to serve the above purpose as it deals with the measurement of economic activities involving inflow and outflow of financial resources, which helps to create useful information for decision making.

Accounting has a universal application for recording events and transactions of family functions to the functions of a national government. For now, concentrate on business activities conducted by companies/firms/ organisations etc.

The growth of the accounting discipline is closely related to the growth of the business world. Imagine for a while when the business of selling goods and rendering of services has stopped for a day around the globe Whether human being can be able to survive the day? The answer is No. So the business activities had hold importance in today's business world and interlinked with the people's well being and survival.

Accounting as a field of study is best identified with recording and summarising economic activities in the form of transactions and events in the books of accounts/records and communication of financial information about business enterprises to the interested users to facilitate decision making.

Accounting aims to fulfil the needs of the rational and sound decision makers. So It acts as a medium for communication of financial information to users. Thus accounting is called a language of the business.

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