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Question 3

Explain the development and role of accounting.

Answer

Development of accounting

 

In ancient times, around 4000 B.C., accounting was used for recording wages and salaries, deposits and withdrawals of valuable goods (such as gold and silver) by the treasures of the king. Afterwards, it was used to record the receipts and payments and balancing of government financial transactions. During 1500 A.D., accounting was used by business firms for recording transactions related to business. In 1800 A.D., accounting was used to record transactions and also to provide information to various users of financial data.

 

Role of accounting− While in the earlier times accounting was merely concerned with recording the financial events (i.e. record-keeping activity); however, now-a-days, accounting is done with the rationale of not only maintaining records, but also providing an information system that provides important and relevant information to various accounting users.

 

1. Substitute of memory− As, it is beyond human capabilities to remember each and every business transaction, so accounting plays an important role in recording these transactions in the book of accounts.



 

2. Assistance to management− Management uses accounting information for short term and long term planning of business activities and to control various costs and budgets.

 

3. Comparative study− In order to ascertain the performance of the business, accounting enables comparison of current year’s profit with that of previous years (intra-firm comparison) and also with other firms in the same business (inter-firm comparison).

 

4. Evidence in court− It acts as evidence that can be used or presented in the court, if any discrepancy arises in the future.

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