Factors Necessitating Systematic Accounting PDF

## The factors that necessitated systematic accounting are given below: 1. **Only financial transactions are recorded** - Those events that are financial in nature are only recorded in the books of accounts. For example, the salary of an employee is recorded in the books but his/her educational qua...

## The factors that necessitated systematic accounting are given below: 1. **Only financial transactions are recorded** - Those events that are financial in nature are only recorded in the books of accounts. For example, the salary of an employee is recorded in the books but his/her educational qualification is not recorded. 2. **Transactions are recorded in monetary terms** - Only those transactions which can be expressed in monetary terms are recorded in the books. For example, if a business has two buildings and four machines, then their monetary values are recorded in the books, i.e. two buildings costing Rs 2,00,000, four machines costing Rs 8,00,000. Thus the total value of assets is Rs 10,00,000. 3. **Art of recording** - Transactions are recorded in the order of their occurrence. 4. **Classification of transaction** - Business transactions of similar nature are classified and posted under their respective accounts. For example, all the transactions relating to machinery will be posted in the Machinery Account. 5. **Summarising of data** - All business transactions are summarised in the form of Trial Balance, Trading Account, Profit and Loss Account and Balance Sheet that provides necessary information to various users. 6. **Analysing and interpreting data** - Systematic accounting records enable users to analyse and interpret the accounting data in a proper and appropriate manner. These accounting data and information are presented in the form of graphs, statements, charts that lead to easy communication and understandability by various users. Moreover, these facilitate in decision making and future predictions. ## The informational needs of external users are: 1. **Banks and other financial institutions** - Banks provide finance in the form of loans and advances to various businesses. Thus, they need information regarding liquidity, creditworthiness, solvency and profitability to advance loans. 2. **Creditors** - These are those individuals and organisations to whom a business owes money on account of credit purchases of goods and receiving services; hence, the creditors require information about creditworthiness of the business. 3. **Investors and potential investors** - They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of their investment, creditors need information about profitability and solvency of the business. 4. **Tax authorities** - They need information about sales, revenues, profit and taxable income in order to determine the levy various types of tax on the business. 5. **Government** - It needs information to determine national income, GDP, industrial growth, etc. The accounting information assists the government in the formulation of various policies measures and to address various economic problems like employment, poverty etc. 6. **Researcher** - Various research institutes like NGOs and other independent research institutions like CRISIL, stock exchanges, etc. undertake various research projects and the accounting information facilitates their research work. 7. **Consumer** - Every business tries to build up reputation in the eyes of consumers, which can be created by the supply of better quality products and post-sale services at reasonable and affordable prices. Business that has transparent financial records, assists the customers to know the correct cost of production and accordingly assess the degree of reasonability of the price charged by the business for its products and thus helps in repo building of the business. 8. **Public** - Public is keenly interested to know the proportion of the profit that the business spends on various public welfare schemes; for example, charitable hospitals, funding schools, etc. This information is also revealed by the profit and loss account and balance sheet of the business.