Accounting Method

Accounting, the method of recording the money value of business transactions sales, purchases, receipts payments, etc. in order to show their effect upon the financial position of the firm or person conducting them. Accounts are prepared to perform three main functions:

(1)To reveal the financial position.

(2) To enable the income tax computations to be prepared.

To provide management with information it requires to control its affairs efficiently.

Double entry is the system of -keeping and accounting commonly used: it recognizes that each business transaction has a twofold aspect, receiving and paying. Each amount payment or receipt is placed to the debit of one account and the credit of another. The advantages of double entry are (a) a complete record of each transaction, (b) full information concerning the business, (c) an arithmetical check.

In practice, all except the very smallest businesses keep some kind of records. These vary from the very incomplete -keeping of small retail shops and the like to the complex accounting systems of the large industrial groups based on computers and other electronic equipment. In recent years there has been much development in cost accounting and management accounting.

Limited liability companies have been required by a long suc-cession of Companies Acts to keep s of accounts and prepare Profit and Loss Accounts and Balance Sheets, which have to be audited. Most other businesses prepare accounts because, apart from any other purpose, they are required by the Inland Revenue as the basis of the income tax assessments. Economists differ on the amount of information that the law should require companies to show. Some argue that disclosure should be limited to information that would not weaken the trading position of the firm. Others argue that fuller disclosure is required in a competitive economy if the relative capacity of individual firms to use capital profitably is to be judged by investors so that it is directed to its most efficient employment; they would have company accounts published more frequently than annually and in more detail (value of sales, subsidiary companies' contribution to profits, purchases and sales of fixed assets, market value of investments quoted on the Stock Exchange, directors' holdings of shares and interest in contracts placed with other companies, and others).

Firms of professional accountants are usually engaged to prepare the final accounts of firms too small to employ full-time accountants. They also usually negotiate the tax assessments with the Inland Revenue. For larger concerns with full-time accountants the hide-pendent accountant's work is usually confined to the audit.

Accounting plays an increasingly important part not only in commerce and industry but also in local and national government, including the nationalized industries. Detailed accounts are published by Government departments dealing with various aspects of the financial and economic position of the public sector of the economy. Social accounting, the recording of transactions determining the economic position of the nation as a whole, has developed extensively since World War II.

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