Basics of Accounting in India
The term accounting has gained a lot of importance over the years. As a business function or as an area of work, accounting knowledge is something relevant for a lot of people.
In this article we shall discuss and analyze some basic concepts in the field of accounting and related terms. I have explained concepts in a simple manner and tried to make it an informative and an interesting read.
The following will be addressed in this blog on accounting
- History of accounting
- Meaning of accounting
- Need and importance of accounting
- Difference between accounting and bookkeeping
History of Accounting
The roots of accounting can be traced back to the start of business itself. Hence in one form or the other, accounting has existed since the start of trade by mankind.
What started as simple mathematical techniques evolved to manual ledger keeping, the single entry and double entry system and into a full-fledged language of communication.
Currently there are various alternatives and accounting software available for businesses. From single user to multiple users and from server based to cloud based having ERP functionalities.
Meaning and Definition of Accounting
Accounting is generally defined as
- The process or work of keeping financial accounts (the dictionary meaning of accounting); or
- The method and art of recording and maintaining financial transaction; or
- The process of systematically recording, measuring, and communicating information about financial transactions
From a layman’s perspective, what we can make from this is – that accounting is a group of tasks required to maintain details of financial transactions in an orderly manner.
Need and importance of accounting
So, what purpose does accounting serve?
Look at the picture below.
We may look at it this way;
What purpose does organizing our stuff (or data) do?
- Firstly, it helps in retrieving important things quickly
- The second is arriving at a summary for a given set of rules or conditions
- And finally, when proper base data is available – it helps in decision making and eventually for taking the required action
Hence accounting for any business is the base activity of record keeping which helps in making financial decisions and hence forms a crucial function in any organization.
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Need and Importance of Accounting
Accounting has multiple uses and applications for a business. It is a continuous process, and goes on throughout the life of an entity.
A carefully set up accounts process helps the organization in collecting and analyzing information relevant for business decisions. All types of MIS, reporting and information regarding the financial health of the organization can be obtained from accounting data.
Every company or business entity should develop and maintain a proper accounting framework which is customized to their industry and type of business.
Maintaining books of accounts is mandatory due to the following
- Producing books of accounts for audits under various regulations like Income Tax, Companies Act etc
- For submission to local authorities, banks, shareholders, partners and collaborators
- To fulfill statutory requirements as per local laws and regulations
- For filing of tax returns, for business performance analysis and allied activities
Difference between Accounting and bookkeeping
Many a times these are used interchangeably or even simultaneously. However, there are certain differences between bookkeeping and accounting. Some of these are as below:
- Bookkeeping is only the first step to be taken in accounting process
- Bookkeeping is more of data entry work whereas accounting is data analysis and reporting
- Bookkeeping can also be seen as a subset of the entire accounting process
- Data from bookkeeping exercise is used for accounting purpose and accounting data is used for reporting, preparing financial statements
- Basic accounting knowledge is required for bookkeeping but for accounting specialized skill and knowledge is necessary
Contact us and share your accounting and bookkeeping requirements.
Having discussed the basic concepts, it leads us further to more questions as below – which will be addressed in my next articles in this series of blogs on Accounting in India.
- Who can be an accountant and qualifications of an accountant?
- Types of accounting
- How to set up the accounting team
- The requirements of accounting in India
- Formats for preparing financials and accounts in India
- Deciding the best accounting software for companies in India
- Accounting standards and reporting requirements in India