Basic Purpose of Accounting

Deriving information needed from the accounting records

The first 200 days of accounting : As asked by his employer, Mr. Kallu Singh started recording all the transactions relating to the business in the accounting record (a book with ruled pages). Based on the "Money Measurement Concept", he took only those transactions which are capable of being measured in value terms into consideration.

Each page in the book he was using for recording had 30 lines.

On an average there used to be around 30 transactions every day. Thus, recording a days transactions resulted in a page getting filled up every day. This was carried on for around 200 days.

Mr. Oberoi in need of information

One day (after the accounting recorded was filled for 200 days), Mr. Oberoi, called Mr. Kallu Singh and told him that he wanted to know whether Mrs. Vimla was due to them or if they had to pay anything to Mrs. Vimla.

How would Kallu Singh derive the information Mr. Oberoi needs?

At the time of writing the accounting records, whenever there was a transaction involving Mrs. Vimla, Kallu Singh used to mention her name. Therefore he could derive the information needed by Mr. Oberoi, by locating all the transactions where Mrs. Vimla's name appears and analysing them.

For deriving the needed information, Mr. Kallu Singh noted down the amounts relating to all those transactions in which Mrs. Vimla got the benefit at a place (like when she bought vegetables on credit). Simultaneously, he noted down the amounts relating to all those transactions in which Mrs. Vimla gave the benefit at another place (like when she paid the amounts due by her).

While noting down the amounts he assigned a positive sign to the amounts related to all the transactions in which Mrs. Vimla took the benefit and a negative sign to the amounts related to the transactions in which Mrs. Vimla gave the benefit.

The data collected by Mr. Kallu Singh

Sales Made (+)
Date S. No Amount
20_5, June 10th 04. 45
11th 09. 25
12th 02. 102
... ... ...
... ... ...
20_5, Dec 8th 06. 76
10th 05. 56
8,125
Amounts Received (−)
Date S. No Amount
20_5, June 11th 05. 50
12th 11. 75
14th 15. 25
... ... ...
... ... ...
20_5, Dec 6th 12. 125
8th 05. 55
8,006

Adding up the two sets of amounts separately he could arrive at two sums. One a positive sum (+ 8,125) and another a negative sum (− 8,006) . Positive sum representing the total benefit received by Mrs. Vimla from them and the negative sum representing the total benefit given by Mrs. Vimla (amounts paid by her) to them.

The two sums were set off and the remainder gave an idea of whether Mrs. Vimla owes them some money or they owe her some amount.

Set Off

  • Writing off one from/against the other
  • Counterbalance
  • cancel

In setting off two numerical values of opposing nature, we deduct one from the other or more specifically the larger from the smaller or its equivalent. What remains is the difference of the two, with the nature as the larger.

The net resultant sum on setting off the two amounts would be + 119 (+ 8,125 − 8006). This implies that Mrs. Vimla is due to the extent of 119 to them.

The mathematical signs could have been assigned to the amounts either way. Had Mr. Kallu Singh taken the amounts due to them as negative, then the totals would have been − 8,125 and + 8,006 and the net figure would have been − 119. Whether the amounts due to them are represented by a positive figure or negative figure is dependent on the signs attached. The signs are only an indication of the opposing nature of the amounts.

What is Mr. Oberoi's need?

Mr. Oberoi is in need of information.

The need to know how much is due from Mrs. Vimla or how much is due to her.

This we say is the need for business or accounting information relating to Mrs. Vimla

Difficulty in deriving the needed information..

Accounting as understood by Mr. Oberoi (initially) is nothing but recording all the business transactions based on the money measurement concept i.e. all the accounting transactions.

But after seeing Mr. Kallu Singh conduct the exercise of deriving the small piece of information needed, Mr. Oberoi, understood that the method he was using for maintain the accounting record had limitations. One major limitation being that it could not provide the information he needed on the fly or at a glance.

For finding the small information relating to Mrs. Vimla, he had to get such a laborious exercise done. He understood that it would not be prudent to think in terms of deriving whatever information he wanted that way.

Therefore Mr. Oberoi, approached a professional accountant for advice. From what the accountant told him he could understand that what he was trying to do was correct, but the format in which he was getting it recorded was not suitable for serving his need for information.

The Basic purpose of Accounting

Why was Mr. Oberoi doing all this? Because he was in need of information. Moreover, it is also found that recording accounting transactions enables us to derive the needed information.

The only limitation that Mr. Oberoi had found was that the format in which he was getting the accounting transactions recorded was not appropriate. If the records are in a manner as advised by the professional accountant, then the information can also be derived in an easy and speedy manner.

Before we go to learn what these are and how these are maintained, we state the basic purpose of accounting.

The Basic Purpose of Accounting

The basic purpose of Accounting is derivation of information.

Accounting is a tool that enables us to derive the financial information.