The Need for Accounting

Learning Accounting through an example

From day eight onwards : Mr. Oberoi conducted his business the same way he did on the first seven days from day eight onwards. He was able to save a certain amount regularly from the profits he made (after meeting his expenses). In a few months time, his savings reached a figure of 10,000.

Remembering the Dues

Since the customers to whom he sold were in direct contact with him and he visited the same set of customers regularly, he faced no difficulty in remembering who had to give him money and to whom he owed money. Initially, he did not find the need to keep anything in writing.

As he had more capital he could buy more and is thus required to sell to a larger customer base.

As he started selling to more number of customers he noticed that he was finding it difficult to remember the details of all those who owe him and those to whom he owed. He noticed that he was forgetting the details sometimes.

Therefore, to overcome this problem, he started using a pocket sized note book wherein he started recording the details of those who owed him and to those whom he owed. He used to write down the date, name and amount and would strike off the entry whenever the due is cleared.

One objective of business is growth

One important objective of business is to make profits. Along with it every business aspires to grow. Since Mr. Oberoi was also a business man (though his business is petty we can call him a businessman since what he does constitutes a business), he too thought on the same lines.

Since he had enough savings and he got well acquainted with the people of the locality in which he was selling vegetables, he thought of setting up a shop at a central location within the locality and expressed his idea with his customers. Almost all his customers encouraged his proposal and promised that they would come down to his shop and buy vegetables daily since it would be nearby only.

He decided to invest his savings of 10,000 for the shop. He set aside 2,500 to buy vegetables (stock) and spent the rest of the amount for the shop. He paid 2,000 as advance for the shop which he rented, purchased wooden racks with 4,000 to place vegetables and some stools with 1,000 and other decoration material for 500.

Need for another person in the business

Mr. Oberoi, set up the shop and opened it on an auspicious day. He used to go to the wholesale market early in the morning and buy vegetables, come back to the shop, open it and make his sales to the customers.

Initially everything seemed fine.

As time went by, he started identifying some problems. Some times he got struck up at the whole sale shop which resulted in a delay in opening the shop.

Since his customers knew him for a long time, they did not complain about this initially. However, as the same problem started cropping up at frequent intervals, they started complaining. Some of them even said that they would have to purchase from elsewhere if the same problem continues.

Since it was becoming impossible for him to conduct the affairs single handedly and the fact that his failure to open the shop in time would increase the risk of losing his customers, he realised that it was high time he bring in some help.

Thus he felt the need for another person taking part in his business affairs.

Ways to involve another person in his business

Mr. Oberoi, had two alternatives to involve another person in his business.
  1. One, taking in a partner who could assist him in his business affairs
  2. Two, taking in an employee who could be entrusted, as his job responsibility, some of the affairs of his business.

Mr. Oberoi took up the second option and employed Mr. Kallu singh as his assistant and entrusted him the responsibility of opening the shop early in the morning, making sales whenever he is not at the shop, attending to customers in his absence and any other function that he may entrust from time to time.

He was promised a monthly salary of 2,000 and a commission of 5% of profits of the business.

Need for accounting

Mr. Oberoi, now feels the need for accounting. The need arises on account of two reasons.
  • First, the magnitude of the affairs of the business are constantly increasing and it would be impossible and improbable for Mr. Oberoi to think in terms of just remembering everything or managing by simply noting down some things in a pocket note book as he had been doing till that time.
  • Secondly, earlier he was the only person involved in the business affairs. Now he has got an employee involved. It would be appropriate on his part to think about accounting, so as to ensure that there would not be any problem relating to reliability in the business.

    Even if he had involved the second person as a partner he would be required to think on these lines.

How to? and What to?

Mr. Oberoi did not have any idea of what account was and what to account for? He put a lot of thought into it and has felt that if he knew everything that is happening in the business he would be able to ensure that everything is going right. Thus he made arrangements to get everything that is happening in his presence/absence recorded (written) in a book.

He assumed that recording all the transactions relating to the business would serve his accounting needs.

Accounting is recording the transactions relating to business

In its primary sense, accounting is nothing but recording of all the transactions relating to business. An accounting record is in effect a diary of all the events or transactions of the business. Accounting thus would be the tasks involved in maintaining that diary.

Therefore for the purpose of his organisations accounting needs, Mr. Oberoi, bought a record (a single ruled book) with a number of pages. Each page had around 30 lines.

Mr. Oberoi entrusted his assistant, Mr. Kallu Singh with the responsibility of maintaining the record. He asked him to write down the business transactions, with each transaction starting on a new line along with the date of occurrence and the details relating to it.

Business Transaction

Any event that occurs in relation to the business which has its effect on the business is a business transaction.