The Importance and purpose of Commercial Accounting
Accounting deals with recording transaction in proper format so
that classifying and summarising tasks are systematically promulgated in such manner for which a rationale report is prepared and communicated to the users of accounting virtually. Suffice it to say; upon the completion of financial report based on Assets, liabilities and Capital, the overall activities of the Company are evaluated among the members of the Company each year in the yearly general meeting. Accounting is important in the sense that the management fixes a target for future period so that the targeted goal of the company is fulfilled as a tentative flow.
Purpose of accounting
Accounts are kept for a number of purposes, of which the main ones are:
• Record-keeping: It is functional to have a documentation of transactions and activities undertaken in the past. Imagine that you make a purchase of an item and the price is say 100 taka. You might feel that this is expensive. If you have a record, you can check and find that the last time you purchased the item, the price was indeed 90 taka.
• Stewardship: Contemporary accounting started when commercial activities became satisfactorily sophisticated that entities were being controlled by managers rather than owners. The owners needed to check that the managers were taking good care of their assets (“stewardship”) and to ensure that this was happening the managers or stewards had to maintain accounts of what they had done with regard to the owner’s property
• Management information: Just as information is needed for the owners the day to day managers need information about the progress of the business. For example in a modern supermarket business the directors might look at reports of trading daily or weekly, whereas the shareholders (the owners) will generally only see the results once a year. The information used by the managers will also tend to be much more detailed.
• Decision making: the information in the accounts will allow users to make decisions
• Budgeting and accountability: accounting information is needed to compare to budgets and to control costs and to monitor the behaviour of parts of an organisation and the effectiveness of different individuals in that organisation.
• Investment appraisal: where investors are considering investing in an entity or a project, accounting information will inform them whether their money is being well spent and whether it is making an acceptable return
• Public information and transparency
Users of accounts
• Shareholders and owners, who will want to monitor the fortunes of their business
• Managers, who need to monitor and control their entity and see the results of their decisions
• Creditors, who are concerned to know if it is safe to deal with another entity. Similarly, customers may also want to know that the entity is stable and will be able to supply a service for them into the future.
• Banks, who have money at stake in almost all public and private entities of any size
• Employees
• The government, which is interested in its role as regulator and tax-collector, but also for the purposes of gathering information and promoting employment, investment and wealth creation
• Public and media
• The parliament, where it has oversight of public accounts and also an interest in major private employers, overseas investors etc.,
• Auditors and regulators, which would include bodies such as Public Accounts Committees and Stock Exchanges
• International investors, lenders and donors
• The public
Rules of accounting
For accounts to be correct and accurate and to give a true and fair view of the activities of any entity, certain basic rules must be followed.
Obviously in every country there tend to be detailed rules on many aspects of accounting. As well as these however there are certain basic rules assumed as part of standard practice, and would be followed as a matter of course by professional accountants.
These rules can be though of as:
boundary rules
measurement rules
ethical rules
Boundary rules
These are rules which distinguish items relevant to the accounts from irrelevant items.
· Entity – Information on the entity only, not on the private affairs of the owners. Deciding what belongs to the business and what belongs to the owner