NEED ANDIMPORTANCE OF ACCOUNTING

Accounting - Need and Importance

What is Accounting? What is the Importance of Accounting? Why do we need accounting?

Accounting is very much connected with our personal lives in so far as it is in respect of every business. We all with intent or unknowingly generate accounting ideas in a way when we plan what we will do with money. We need to plan how much money will be spent whilst how much of it will be kept back. What is through this activity is a budget gets prepared. And we all are familiar with this concept - which is universally acceptable, that money must be spent cautiously. The same is true of a business. It is therefore imperative for a business to know about the inflow and out flow of economic resources and their results. Thus, accounting is the very need of a business to provide the information which is useful for sound economic decision making process and owing to the diversification between ownership and management.

Being known as "The Language of business", accounting is the basic need of a business organization to find out where it stands. It is of great essence to provide the basis for planning and budgeting while dealing with measurement of economic activities and communicating financial information to the users for decision making. Accounting is also meant for protecting the properties of business and communicating the results obtained from the financial statements to the intended parties like share holders, debtors, creditors, and investors while meeting the legal requirements. Accounting is included in those fields that are growing faster in this era. It is dynamic at the present time and meets the growing demands of trade, commerce and industry. It is appropriate to mention here that the advent of industrial revolution and technological advancements have given rise to widen more business prospects at the same time as bringing about change in the domain of accounting by which it has now begun to be known as a tool of management for planning and controlling process. Thus, it can be rightly said, in the present day and age, no economic activity can be carried out successfully with no thought of accounting.

According to American accounting association, accounting has been defined as, "The process of identifying, measuring, and communicating information to permit judgment and decision by the users." Yet another definition of American Institute of Certified Public Accountants (AICPA) is that "Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof."

Accounting entails recording, classifying and summarizing of business transactions. It is a process of identification, measurement and communication of economic information involving four interconnected phases. They are outlined herein: At the outset, the first phase is meant to record the economic events or transactions -depending upon their occurrences, chronologically in the books of accounts - called journals. This process is known as journalizing. Next comes the phase of ledger-posting: It is the process by which all the transactions are synthesized account-wise so that the accumulated balance of each of those accounts can be determined. The process of ledger posting is vitally important as it helps in ascertaining the net effect of various transactions during a given period. The subsequent stage is preparing the trial balance which involves the arrangement of all ledger accounts having been aggregated into debit and credit balances. This activity enables to check and confirm whether the total of debits is equal to that of credits. Finally, comes the phase of preparing financial statements. This phase is meant for finalization of accounts by measuring profit & loss account and preparing Balance Sheet- at the end of accounting period.

Every business needs to have two prime objectives, such as, to earn profit and to remain solvent and the information in relation to these objectives while ensuring whether they are being accomplished is provided by accounting. Accounting is important in the sense that it enables a business house to maintain complete and orderly prepared records of economic events by way of preparing books while facilitating the information for various purposes. Furthermore it helps to ascertain the net results in terms of profit or loss (Income Statement) and providing the information about financial position of the business (Balance Sheet) to the owners of a business relating to what the entity owns in the form of assets and what it owes in the form of liabilities at a particular point of time. Accounting information is valuable to the concerned managers too so as to ensure whether the business entity is being directed as it should be, and simultaneously it is a means to provide the information to the investors to find out the future prospects of business. It is also useful for the employees and customers in order to know the condition of the business entity.

Accounting is the basis and of a great assistance to management for planning, controlling and decision making process. It is with the help of accounting information that the performance of an entity can be appraised, at the same time as, its methodical records make possible to eliminate the frauds and the thefts. Furthermore, being concerned primarily with the creation of financial information for its users, accounting provides useful information for ascertaining the effectiveness and efficiency of a business. Hence, accounting is must for every business. Exclusive of accounting leads to create chaos and discrepancies in business transactions.

Accounting ought to be there for a business to run with accuracy, efficiency and effectiveness in terms of overall economic activities and their results. Accounting helps the management in planning and decision making process. There is no replacement of sincere and talented accountants, nor of their capabilities, nor of their diligence because their services offered in keeping track of every single one economic event while protecting entire business properties are so strong and efficient that the need of even highly paid bodyguards of businessmen is eclipsed. As it goes in the words of Elvis Presley, "I don't have any use for bodyguards, but I do have a specific use for two highly trained certified public accountants."

Methods of Depreciation

Depreciation Methods

Fixed Instalment Method is also known as original cost method or straight line method. Under this method, a fixed percentage of the original value of the asset is written off every year so as to reduce the asset account to nil or to its scrap value at the end of the estimated life of the asset. Method is more useful for furniture, fixtures, short leases and other asset of small intrinsic value. Advantage of this method is that it makes calculation of depreciation simple and can write down an asset to zero at the end of its working life if desired.
Diminishing balance method is also known as reducing installment method or written down value method. Under this method, depreciation will be calculated at a certain percentage each year on the balance of the asset which is brought forward from the previous year. Every year the installment of depreciation will reduce as the beginning balance of the asset in each year will reduce. It is usually adopted for plant and machinery. This method tends to give a fairly even charge of depreciation against revenue each year. This method does not take into consideration the asset as an investment and interest is not taken into consideration.
Annuity method amount spent on the purchase of an asset is regarded as an investment and such investment is assumed to earn interest at a certain rate. Every year the asset account is debited with the amount of interest and credited with the amount of depreciation.
Depreciation Fund method is applied to long leases etc. Method implies that the amount written off as depreciation should be kept aside and invested in readily saleable securities.
Insurance Policy Methods arrangements are made with an insurance company which will receive premiums annually and pay at the end of the fixed period.
Revaluation Method – the asset is revalued at the end of the accounting year and this value is compared with the value of the asset at the beginning of the year. The difference is treated as depreciation.
Depletion Method: Obtained by simply dividing the cost of the mine by the total quantity of the minerals expected to be available.
Machine Hour Rate Methods- The life of the machine is fixed in terms of hours. Depreciation to be written off in the year will be ascertained by multiplying the hourly rate of deprecation by the number of hours that the machine actually runs in the year.

void agreement

Void Agreement

Definition:Literally: Void means having no legal value and agreement means Arrangement, promise or contract made with somebody.  So void agreement means an agreement that has no legal value.

Traditionally: “An agreement not enforceable by law is said to be void”. [Sec 2(g)]

LEGAL POSITION

A void agreement has no legal effect. An agreement which does not satisfy the essential elements of contract is void. Void agreement confers no rights on any person and creates no obligation.

Example of void agreement: An agreement made by a minor, agreement without consideration, certain agreements against public policy etc.

Agreement which become void:
An agreement, which was legal and enforceable when it was entered in to, may subsequently become void due to impossibility of performance, change of law or other reason. When it become void the agreement ceases to have legal effect.

EXPRESSLY DECLARED VOID AGREEMENT
There are certain agreements, which are expressly declared to be void.
They are as follows:
(1)      Agreement by a minor or a person of unsound mind.[Sec(11)]
(2)      Agreement of which the consideration or object is unlawful[Sec(23)]
(3)      Agreement made under a bilateral  mistake of fact material to the agreement[Sec(20)]
(4)      Agreement of which the consideration or object is unlawful in part and the illegal  part can not be separated from the legal part [Sec(24)]
(5)      Agreement made. without consideration.[Sec(25)]
(6)      Agreement in restraint of marriage [Sec(26)]
(7)      Agreement in restrain of trade  [Sec(27)]
(8)      Agreement  in restrain of legal proceedings[Sec(28)]
(9)      Agreements the meaning of which is uncertain [Sec(29)]
(10)    Agreements by way of wager [Sec(30)]
(11)    Agreements contingent on impossible events [Sec(36)]
(12)    Agreements to do impossible acts [Sec(56)]

Some discussions on void agreement are as follows:

(1)    Agreement by a Minor Or a Person of Unsound Mind-
A person who has not completed 18 years of age signifies as minor. Law acts as the guardian of minors and protects their rights, because their mental facilities are not mature- they do not possess the capacity of judge what is good and what is bad for them. Accordingly, where is a minor charged with obligations and the other contracting party seeks to enforce those obligations against the minor, the agreement is deemed as void.

         A person who does not possess a sound mind or whose mental powers are not arranged or whose mental condition is not under his or her own control. Any agreement by person of unsound mind is absolutely void because he has no capacity to judge, what is good and what is bad for him.

Illustration
(a)    A, 15 years old boy, made an agreement with B to give him Tk.1000. This is a void agreement.
(b)    A mentally disordered man made an agreement with X to marry her, but this is not a valid agreement.

(2) Agreement Made Without Consideration-
An agreement made without consideration is void, unless
1)    it is expressed in writing and registered under the law for the time being enforce for the registration of(documents), and is made on account of natural love and affection between parties standing in a near relation to each other; or unless.
2)    It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promissory was legally compellable to do, or unless.
3)    It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in the behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

Illustrations
a)    A promises for no consideration, to give to B Rs. 1000; this is a void agreement.
b)    A, for natural, love and affection, promises to give his son, B Rs. 1000. A puts his promise to B into writing and registers it. This is a contract.
c)    A finds be B’s purse and gives it to him. B promises to give A Rs. 50. This is a contract.
d)    A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.

(3) Agreements in Restraint of Marriage-
 Every individual enjoys the freedom to marry and so according to section 26 of the contract act “every agreement in restraint of the marriage of any person, other than a minor, is void.”
 However, an agreement restraint of the marriage of a minor is valid under the section.

It is interesting to note that a promise to marry a particular person does not imply any restraint of marriage and is, therefore, a valid contract.

This section enact that agreement in restraint of the marriage of any person, other than a minor is void. In the interest of the society, contracts for marriage are scrutinized with a close and vigilant suspicion of undue influence, fraud or imposition. The law presumes constrictive fraud, on grounds of public policy, in agreements respecting marriages since marriages of a suitable nature are of the deepest importance of the wellbeing of the society, as upon the equality and mutual affection much of their happiness, sound morality, and mutual confidence, hence every temptation of the exercise often undue influence, or a seductive interest in procuring a marriage is suppressed, for there is infinite danger that it may, under the guises of friendship, confidence, flattery or falsehood, accomplish the ruin of person especially females. So the law—
(a)    prevents improvident, ill-advised, and often fraudulent matches;
(b)    Avoid all such contracts as tend to the deceit and injury, or encourage artifices and improper attempts to control the exercise of free judgment;
(c)    Discountenances secret contracts made with prevents and guardians, whereby on a marriage, they to receive a benefits
(d)    Renders invalid certain agreements in restraint of marriage.

Illustrations
(a)    A agrees with B for good consideration that she will not marry C. It is a void agreement.
(b)    A agrees with B that she will marry him only; it is a valid contract of marriage.  

(4) Agreement in Restraint of Trade-
The constitution of India guarantees that the freedom of trade and commerce to every citizen and therefore section 27 declares “every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” Thus no person is at livery to deprive himself of the fruit of his labor, skill or talent, by any contracts that he enters into.

It is to be noted that whether restraint is responsible or not, if it is in the nature of restraint of trade, the agreement is void always, subject to certain exceptions provided for statutorily.

Illustration
An agreement whereby one of the parties agrees to close his business in consideration of the promise by the other party to pay a certain some of money , is void, being an agreement is restraint of trade, and the amount is not recoverable, if the other party fails to pay the promised some of money. (Mad hub Chander vs.  Raj Kumar).

But agreements merely restraining freedom of action necessary for the carrying on of business are not void, for the law does not intend to take away the right of a trade to regulate his business according to his own discretion and choice.

Illustration
An agreement to sell all produce to a certain party, with stipulation that the purchaser was bound to accept the whole quantity, was held valid because it aimed to promote business did not restrained it (Mackengie vs. Striramiah). But where in a similar agreement the purchaser was free to reject the goods (i.e. was not bound to accept the whole quantity tendered) it was held that the agreement was void as being in restraint of trade (Sheikh Kalu vs. Ram Saran)

(5) Agreement in restraint of legal proceedings-
Every agreement, by which any party thereto is restricted absolutely from enforcing his right under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent. Section 28 declares the following two kinds of agreements void:
(a)    An agreement by which a party is restrained absolutely from taking usual legal
Proceeding, in respect of any rights arising from a contract.
(b)    An agreement which limits the time within which one may enforce his contract
Rights, without to the time allowed by the limitation act.

Illustration
In a contract of fire insurance, it was provided that if a claim is rejected and a suit is not filed within three months after such rejection, all benefits under the policy shell be forfeited. The provision was held valid and binding and the suit filed after three months was dismissed. (Baroda spinning Ltd. vs. Satyanarayan Marine and Fire Ins. Com. Ltd.)

Exception 1: This section shell not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shell be referred to arbitration and that only the amount awarded in such arbitration shell be recoverable in respect of the dispute so referred.

Exception 2: Nor shell this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.

(6) Uncertain Agreements-
“Agreements, the meaning of which is not certain, or capable of being made certain, are void” (Sec-29). Through Sec-29 the law aims to ensure that the parties to a contract should be aware of the precise nature and scope of their mutual rights and obligation under the contract. Thus, if the word used by the parties are or indefinite, the law cannot enforce the agreement.

Illustration
(a)    A agrees to sell to B “a hundred tons of oil.” There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty.
(b)    A who is dealer in coconut oil only, agrees to sell to B “a hundred tons if oil.” The nature of A’s trade affords an indication of the meaning of the words, and A has entered into a contract   for the sale of one hundred toms of coconut oil.
(c)    A agrees to sell to B “one thousand mounds of rice at a price to be fixed by C.” As the price is capable of being made certain, there is no uncertainty here to make the agreement void.
(d)    A agrees to sell to “his white house for rupees five hundred or rupees one thousand.” There is nothing to show which of the price was to be given. The agreement is void.

Further, an agreement “to enter into an agreement in future” is void for uncertainty unless all the terms of the proposed agreement are agreed expressly or implicitly. Thus, an agreement to engage a servant some time next year, at a salary to be mutually agreed upon is a void agreement.

(7) Wagering Agreement-
Literally the word ‘wager’ means ‘a bet’ something stated to be lost or won on the result of a doubtful issue, and, therefore, wagering agreements are nothing but ordinary betting agreements. Thus where A and B mutually agree that if it rains today A will pay B Tk.100 and if it does not rain B will pay A Tk.100 or C and D entered into agreement that on tossing up a coin, if it fall head upwards C will pay D Tk.50 and if falls tail upwards D will pay C Tk.50, there is a wagering agreement.

In Tracker vs. Hardy Cotton, L.J., described a ‘wager’ ad follows: “The essence of gaming and wagering is that one party is to win and the other to lose upon a future event which at the time of the contract is of an uncertain nature- that is to say, if the event turns out the other way he will win.”

Agreement by way of wager, void. Section 30 lays down that “agreements by way of wager are void; and no suit shell be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made,” Thus, where A and B enter into an agreement which provides that if England’s cricket team wins the match, A will pay B Rs. 100, and if it loses B will pay Rs. 100 to A, nothing can be recovered by the winning party under the agreement, it being a wager. Similarly, whether C and D enter into a wagering agreement and each deposits Rs.100 with Z instructing him to pay or give the total sum to the winner, no suit can be brought by the winner for recovering the bet amount from Z, the stake-holder. Further, if Z had paid the sum to the winner, the looser   cannot bring a suit, for recovering his Rs.100, either against the winner or against, the stake-holder, even if Z had paid after the loser’s definite instructions not to pay. Of course the looser can recover back his deposit if he makes the demand before the stake-holder had paid it over to the winner (Ratnakalli vs. Vochalapu). But even such a deposit cannot be recovered by a loser in the States of Maharashtra and Gujarat where such an agreement is void and illegal.

(8) Agreement Contingent on Impossible Events-
“Contingent agreements to do or not to do anything if an impossible event happens are void, whether the impossibility of the event is know on not to the parties to thr agreement at the time when it is made.” (Sec. 36)

Illustration
(a)    A agrees to pay B Rs.1000 (as a loan) if two straight line should enclosed a space. The agreement is void.
(b)    A agrees to pay B Rs.1000 (as a loan) if B will marry A’s daughter, C. C was dead at the time of the agreement, the agreement is void.

(9) Agreements to do Impossible Act-
“An agreement to do an act impossible in itself is void.” (Sec, 56 Part-1)

Illustration
(a)    A agrees with B to discover treasure by magic. The agreement is void. [Section 56].
(b)    A agrees with B to run with a speed of 100 Kilometer per hour. The agreement is void.

advantages and disadvantages(merits & demerits) of joint stock company.

What are the merits and demerits of a joint stock company

While opting company form of business, the entrepreneur should clearly gone through the distinction between company with partnership form of business. The next step arises a regard to why to go for company form of business. The following points depicts the advantageous points of this form of business.

Advantages of Joint Stock Company:

(1) Huge resources:

A company can raise large amount of resources from the genera public by issuing shares. Since, there is no maximum limit of the number of shareholders ii case of public company, fresh shares can be issued to meet the financial requirement. Capita can also be obtained by issuing debentures and accepting public deposits.

(2) Limited liability:

The liability of the shareholders is limited to the extent of the face value of the shares held by them or guarantee given by them. The shareholders are not liable personally for the payment of debt of the company. Thus, limited liability encourages the investors to put their money in the shares of the company.

(3) Transferability of shares:

The shares of the public company are transferable without any restriction. A shareholder can sell his shares at any time to anybody in the stock exchange Therefore, the conservative and cautious investors are also attracted to invest in the shares of public company. This brings liquidity to the investors.

(4) Stability of existence:

A joint stock company enjoys perpetual succession. It continues for a long period of time because it is unaffected by the death, insolvency of the shareholders directors. Change of ownership and management also does not affect the continuity of the business.

(5) Efficient management:

A company can hire the services of professional manager for its functional areas because of its financial strength. The directors who look after the management of the company are generally experienced and persons of business acumen Therefore, the management of a company is sure to be efficient.

(6) Scope for expansion:

A company can generate huge financial resources by issuing shares and debentures to finance new projects. Companies also transfer a portion of their profit to reserve which can be utilised for future expansion. The managerial capabilities a the disposal of a company helps it for planning the future expansion and growth.

(7) Economies of large scale production:

The company is in a position to undertake large scale operation because of its huge financial resources. When the scale of operations i large, the economies in buying, selling, production etc. are enjoyed by the undertaking. The economies of large scale enables the company to produce goods at lower cost and supply the same to the consumers at cheaper prices.

(8) Public confidence:

A company submits required information to the Government and other authorities at regular intervals. The accounts of the company are audited by chartered accountants and also published for the information of the stakeholders and others. This enables a company to enjoy the trust and confidence of the public.

(9) Social benefits:

A joint stock company provides a number of benefits to the society. 1 creates employment opportunity, investment opportunity, utilises the unutilised natural resource of the nation, supplies quality products and services at cheaper rate and generates revenue for the Government and also undertakes many infrastructural developmental programmes in the country.

(9) Diffused risk:

The entire business risk of a company is distributed over a large number of shareholders. Thus, the risk is reduced for each shareholder. No shareholder is burdened with more than what he has paid as the price of shares hold. No personal property will be attached for the same.

(10) Tax benefits:

As a separate entity, companies pay income tax at a flat rate. Because of this, the company's tax burden on higher income is less in comparison to other forms of business organisation. Companies also avail tax exemptions deductions and concessions for undertaking their operations in specific areas, dealing with nature of goods and services and others.

Disadvantages of Joint Stock Company

Despite the above advantages, the company form of organisation also suffers from certain demerits. The following are some of the important demerits of a company which every entrepreneurs should know while going for selection of type of business.

(1) Difficulty in formation:

The formation of a joint stock company is very difficult, time taking and expensive as compared to any other form of organisation. Conceiving the very idea and getting it implemented is very difficult process. Preparation of the basic documents like memorandum of Association and Articles of Association, fulfilling legal formalities as per the Act and getting the business registered needs lot of time, money and expertise.

(2) Oligarchic management:

The management of company is democratic in theory but oligarchic in practice. It is controlled by a small group of Board of Directors who hardly protect the interest of other shareholders. They may manipulate the things with an intention to be re-elected as directors. That is why it is said that shareholders do nothing, know nothing and get nothing.

(2) Delay in decision-making:

The Board of Directors of the company decides about the policies and strategies of the company. Certain decisions are taken by the shareholders. The meeting of the directors or the shareholders cannot be held at any time as and when required. Thus, the decision making process is usually delayed. The delay in decision-making may result in losing some business opportunities.

(3) Separation of ownership and management:

The company is not managed by the shareholders but by the directors who are the elected representatives of the shareholders. The directors and managers may lack the personal initiative and motivation to manage the company efficiently as the shareholders (owners) themselves would.

(4) Lack of secrecy:

Each and every business strategy is discussed in the meeting of the Board of Directors. The annual accounts are published and compliance to Government, Tax authorities etc. are made at regular intervals. Therefore, it is very difficult to maintain business secrecy in a company form of organization in comparison to sole proprietorship and partnership.

(5) Speculation in shares:

When profit is earned by manipulating the prices of shares without actually holding the shares, it is considered as speculation. A company provides scope for speculation and the directors and managers may derive personal benefit out of this. It is harmful to the innocent small shareholders who invest their hard earned money with a view to get higher rate of return.

(6) Fraudulent management:

The possibility of starting a bogus company, collecting huge sums of money and subsequently bringing liquidation of the company is not ruled out. The promoters with an intention to defraud may indulge in such practices. The directors and managers may function for their personal gain overlooking the interest of the company.

(7) Concentration of economic power:

The company form of business gives scope for concentration of economic power in the hands of a few through multiple directorship and creation of subsidiary companies. Some persons are elected as directors in a number of companies. These directors formulate policies of the company which will safeguard and promote their own interest. Majority shares of other companies are purchased to create subsidiary companies.

(8) Excessive Government regulations:

A company functions under too much of regulations of the Government. Reports are to be filed and compliance are made at regular intervals to appropriate authorities failing which penalty is imposed. A considerable time and money of the company is involved in the process of regular compliance.

(9) Evils of Factory system:

Due to large scale operation, the company may give rise to insanitation, pollution, congestion and some social evils like migration from villages to towns, shifting from agriculture to industry etc. They cause instances in the society.