The Need for Accounting
Learning Accounting through an example
Day eight onwards
Mr. Oberoi conducted his business in a manner similar to the manner in which he conducted it on the first seven days.
Mr. Oberoi used to carry the vegetables in a basket over his head. The size of basket and the maximum weight he could carry over his head imposed a limitation on the vegetable stock he could purchase for being sold.
Over the days, on account of the profits he made, his capital grew from a few hundreds to a thousand and more. On account of it, his ability to invest in purchasing vegetable stock kept growing.
This can be noticed from his position after purchasing vegetable stock on a day
| Capital||1,250|| Cash|
On coming to know of this limitation, the wholesale vendor offered to lend an unused cart he had to Mr. Oberoi, free for use, as long as he bought the vegetables exclusively from him. The wholesale vendor looked at the benefit of additional sale to both himself as well as Mr. Oberoi.
One objective of business is growth
The primary objective of business is to make profits. Growing the business is one of the means to aid the achievement of this obective. Mr. Oberoi being a businessman (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.
Mr. Oberoi took up that offer as he could increase his sales and make more profit. He had enough resources to purchase additional stocks that he could take on the cart.
His position, on a day after taking up the offer, after purchasing vegetable stock
| Capital||1,520|| Cash|
Problem in remembering or recollecting the dues
Initially when Mr. Oberoi was carrying the stock in a basket over his head, he had few customers. The customers to whom he sold were in direct contact with him and he visited the same set of customers regularly. At times his customers were due to him (his debtors) and at times he owed money to the vegetable vendor as well as his customers (when he could not give them the change). He did not find the need to write down anything as he did not find it difficult to remember who owe him and to whom he owed as well as the respective amounts.
After he started using the cart, the number of customers he sold to grew and he was buying substantially large quantities and greater varities of vegetables than earlier.
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. The varities of vegetables for which he had to remember purchase prices so as to arrive at the selling price also increased substantially. He noticed that he was forgetting the information sometimes.
To overcome this problem, he started using a pocket sized note book wherein he started writing down (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.
Get established and grow
Over a period, his ability to invest has increased further in the form of capital accumulated through profits. He had a substantial amount accumulated and he could not invest all that is available since there was a limit to the stock that he could carry on the cart.
| Capital||9,900|| Cash|
To enable him to get established and grow further, he thought of setting up a shop. Since he had enough savings and he got well acquainted with the people of the locality in which he was selling vegetables, he zeroed in on a central location within the locality and expressed his idea of setting up the shop with his customers. Almost all his customers encouraged him and promised that they would come down to his shop and buy vegetables daily since it would be nearby only.
His capital by that time was 10,200, 10,000 of which was supported by cash that he could use for seting up the shop.
| Capital||10,200|| Cash|
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.
| Capital||10,200|| Cash|
Consider the Wooden Racks, Stools, and Decoration Material together to be Furniture.
Need for another person in the businessMr. 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 assistance.
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.
- One, taking in a partner who could assist him in his business affairs or
- 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. Mr. Kallu singh was entrusted the responsibility of opening the shop early in the morning, making sales whenever Mr. Oberoi was not at the shop, attending to customers in his absence and any other function that he may be entrusted from time to time.
He was promised a monthly salary and a commission of 5% of profits of the business.
Need for accounting
Mr. Oberoi, on account of the following reasons, felt the need for accounting.
- 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 trust and reliability in the business.
Even if he had involved the second person as a partner he would be required to think on these lines.
Accounting - How/What?
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 considered accounting to be a tool that would be providing all the information relating to the business that he wanted. With this idea he assumed that writing down (recording) all the transactions relating to the business would serve his accounting needs.
- An act performed
Accounting is recording transactions relating to the 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 comprise of all the tasks involved in maintaining that diary.
For the purpose of his organisational accounting needs, Mr. Oberoi, bought a record (a single ruled book) with a number of pages with each page having 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.