Introduction To Accounting: Part 1: Need For Accounting

Whenever we start doing business, a number of transactions take place. For example, if we start a business of say, a book store (i.e. we’ll be buying books from wholesalers and publishers, and selling them to customers), following things pop up in our minds at the first instance:

1. Taking an office/shop on rent for the purpose of our business
2. Contacting the wholesalers and the publishers
3. Purchasing books from them
4. Advertising
5. Selling the books to customers

Now, when the business starts functioning, we’ll want to know how much profit we have earned from the business in a year. It is practically impossible to just remember whatever happened in the whole year. For example, we may have bought books from the wholesalers or publishers on credit (credit: the ability of a business entity to obtain goods before payment), so we would want to know how much money we owe them. On the other hand, we may have sold certain books to our customers on credit (credit: the ability of customers to obtain goods before payment), and we would want to know how much money our customers owe us.

Therefore, it is advisable to record all the Financial Transactions that take place, as and when they take place. Hence, the need for “Accounting” arises. A Financial Transaction is a transaction which involves money. The financial transactions are recorded in what is called “Books of Accounts”.