Every individual or a group of individuals (Organization) carries out a business with the intention to earn profits. When starting a business an organization or a person will need to make some investment in the form of capital, buy some assets like purchase of goods, land, office Building etc. and once the business starts it will generate profits or loss depending upon various factors like the demand of the product or service, competition in the market etc. A businessman is always keen to know two facts about his business:.
Where is his effort heading to i.e. whether the business is generating a profit or a loss? If the income is more than the expense it will generate a profit, and if the expenses are more than the income generated than there will be a loss. Another scenario would be income generated is equal to the expense that is break even. .
Where do we stand? Like if the businessman or a organization is into a business for more that two years and they would want to know the financial situation of the business at that given point of time like whether they have been making profits or incurring a loss or are they breaking even this would help them to sort out there future course of action.
This questions cannot be answered by guess work but by recording the transactions in a systematic manner like what assets were bought, capital invested, goods sold etc. This is when accounting comes into picture.
Definition of Accounting.
Despite the fact that many practitioners describe accounting as an art and not a science, there seems to be a little consensus on an accurate definition of the term. Hence "accounting can be described as the process of recording, classifying and summarizing the financial transactions of a business organization and reporting, interpreting and communicating this information to interested parties such as the owners(s) of the business, creditors, and investors."" The recording of the business transactions in a set of books, which are called books of accounts and maintaining and updating these books, is called book keeping.
