IMPORTANCE OF

ACCOUNTING IN
BUSINESS
ORGANIZATION
 IMPORTANCE OF ACCOUNTING

 To run a business you need data, records, reports, analysis,

accurate information about assets, debts, liabilities, profits;
and that is why Accounting is Importance for any business
activities.
 The accounting information is very important for the
management or the decision making body of an organization.
 Management cannot make decision without reasonable
information’s for backing it up.
 To make a decision, it has to be based on genuine facts and
figures. For making a decision at every level of management,
accounting information is crucial.
 CONT….

 Accounting gives the management the information regarding

the financial position of the business, such as; profit and loss,
cost and earnings, liabilities and assets, etc.
 For making the right decision, Management depends on
statistical data and information that accounting provides.
 The main object of Accounting is to record financial
transactions systematically in the books of accounts and to
find out the profit-loss and financial position of a business.
 Ascertainment of profit-loss and financial position,
interpretation and analysis of accounts and statements,
development of accounting system, a collection of statistical
and economic data, formulation of financial principles and
financial planning and controlling results as per plan etc. are
the main functions of Accounting.
 IMPORTANCE OF ACCOUNTING

 Helps in evaluating the performance of business –The

accounting records reflects the results of operations as well
as statement of financial position. Also various balance sheet
and profit & loss accounts ratios are calculated which help
user of financial statements to analyse the performance of an
entity. For example debt equity ratio, Current ratio, Turnover
ratio etc. Also we can compare previous period accounting
data with current period as well as budgeted figures for
variance analysis.
 Helps to manage and monitor cash flow – The working capital
and cash requirement of an enterprise can be duly taken care
by proper accounting system.
 IMPORTANCE OF ACCOUNTING

 Helps business to be statutory compliant – Proper business

accounting ensures timely recording our liabilities which
needs to be paid within the prescribed time line. This includes
provident fund, pension fund, VAT, sales tax, Income tax.
Timely payment of liabilities helps enterprises to be statutory
compliant.
 Helps to create budget and future projections – Accounting
data helps an enterprise to prepare budget and forecast for
future period. Business trends are projected based on past
data produced by accounting system.
 Helps in filing financial statements with regulators, stock
exchanges and filing of tax returns .
 Other information –The accounting system provides a number
of qualitative and quantitative customized reports which are
required in day to day business activities.
 CAPITAL EXPENDITURE

 Capital expenditures are the amounts that companies use to

purchase major physical goods or services that will be used
for more than one year. For example, a company might have
capital expenditures to increase or improve its fixed assets.
 Capital expenditures might include:
 Plant and equipment purchases
 Building expansion and improvements
 Hardware purchases, such as computers
 Vehicles to transport goods
 REVENUE EXPENDITURE

 A revenue expenditure is a cost that will be an expense in the

accounting period when the expenditure takes place.
 The revenue expenditures take place after a fixed asset had
been put into service and simply keeps the asset in working
order.
 Examples of revenue expenditure:
 Wages paid to factory workers.
 Oil to lubricate machines.
 Power required to run machine or motor.
 Cost of saleable goods.
 Depreciation of fixed assets used in the business.
DIFFERENCE BET WEEN CAPITAL EXPENDITURE
AND REVENUE EXPENDITURE
Revenue Expenditure
 Its ef fect is temporary, i.e.
the benefit is received
within the accounting year
 Neither an asset is acquired
nor the value of an asset is
increased.
 It has no physical existence
because it is incurred on
items which are used by the
business.
Capital Expenditure
 Its ef fect is long -term, i.e. it
is not exhausted within the
current accounting year-its
benefit is received for a
number of years in future .
 An asset is acquired or the
value of an existing asset is
increased.
 Generally it has physical
existence except intangible
assets.
DIFFERENCE BET WEEN CAPITAL EXPENDITURE
AND REVENUE EXPENDITURE
Revenue Expenditure
 It is recurring and regular
and it occurs repeatedly.
 This expenditure helps to
maintain the business.
 The whole amount of this
expenditure is shown in
trading P & L A/c or income
statement.
 It does not appear in the
balance sheet.
Capital Expenditure
 It does not occur again and
again. It is nonrecurring and
irregular.
 This expenditure improves
the position of the business. .
 A portion of this expenditure
(depreciation on assets) is
shown in trading & P & L A/c
and the balance is shown in
the balance sheet on asset
side.
 It appears in the balance
sheet until its benefit is fully
exhausted.
 CAPITAL & REVENUE RECEIPTS

 CAPITAL RECEIPTS: Receipts which are non-recurring (not

received again and again) by nature and whose benefit is
enjoyed over a long period are called "Capital Receipts", e.g.
money brought into the business by the owner (capital
invested), loan from bank, sale proceeds of fixed assets etc.
Capital receipt is shown on the liabilities side of the Balance
Sheet.
 REVENUE RECEIPTS: Receipts which are recurring (received
again and again) by nature and which are available for
meeting all day to day expenses (revenue expenditure) of a
business concern are known as "Revenue receipts", e.g. sale
proceeds of goods, interest received, commission received,
rent received, dividend received etc.
 DIFFERENCE BET WEEN CAPITAL RECEIPTS
AND REVENUE RECEIPTS
Revenue Receipts
 It has short-term ef fect. The
benefit is enjoyed within
one accounting period.
 It occurs repeatedly. It is
recurring and regular.
 It is shown in profit and
loss account on the credit
side.
 It does not produce capital
receipt.
Capital Receipts
 It has long -term ef fect. The
benefit is enjoyed for many
year s in future. .
 It does not occur again and
again. It is nonrecurring and
irregular.
 It is shown in the Balance Sheet
on the liability side .
 Capital receipt, when invested,
produces revenue receipt e.g.
when capital is invested by the
owner, business gets revenue
receipt (i.e. sale proceeds of
goods etc.).
 DIFFERENCE BET WEEN CAPITAL RECEIPTS
AND REVENUE RECEIPTS
Revenue Receipts
 This does not increase or
decrease the value of asset
or liability.
 Sometimes, expenses of
capital nature are to be
incurred for revenue
receipt, e.g. purchase of
shares of a company is
capital expenditure but
dividend received on shares
is a revenue receipt.
Capital Receipts
 The capital receipt
decreases the value of
asset or increases the value
of liability e.g. sale of a
fixed asset, loan from bank
etc.
 Sometimes expenses of
revenue nature are to be
incurred for such receipt
e.g. on obtaining loan (a
capital receipt) interest is
paid until its repayment.