ROLE OF ACCOUNTING

Accounting plays an important and useful role by developing the information for providing answers to many questions faced by the users of accounting information:

(1) How good or bad is the financial condition of the business?

(2) Has the business activity resulted in a profit or loss ?

(3) How well the different departments of the business have performed in the past?

(4) Which activities or products have been profitable?

(5) Out of the existing products which should be discontinued and the production of which commodities should be increased?

(6) Whether to buy a component from the market or to manufacture the same?

(7) Whether the cost of production is reasonable or excessive?

(8) What has been the impact of existing policies on the profitability of the business?

(9) What are the likely results of new policy decisions on future earning capacity of the business?

(10) In the light of past performance of the business how should it plan for future

to ensure desired results?

Above mentioned are few examples of the types of questions faced by the users of accounting information. These can be satisfactorily answered with the help of suitable and necessary information provided by accounting.

Besides, accounting is also useful in the following respects:

(a) Increased volume of business results in large number of transactions and no businessman can remember everything. Accounting records obviate the necessity of remembering various transactions.

(b) Accounting records, prepared on the basis of uniform practices, will enable a business to compare results of one period with another period.

(c) Taxation authorities (both income tax and sales tax) are likely to believe the facts contained in the set of accounting books if maintained according to generally accepted accounting principles.

(d) Accounting records, backed up by proper and authenticated vouchers, are good evidence in a court of law.

(e) If a business is to be sold as a going concern, then the values of different assets as shown by the balance sheet helps in bargaining proper price for the business.