Accounting is the lingo of business. It records all the transactions that take place during the accounting period. It maintains track of all the financial transactions during the period.

Financial statements like profit and loss account and balance sheet provides the outsider a fair idea about the financial position of the business. The statements are presented in such a way that the outsider can estimate the worth of the business. The asset side of the balance sheet reveals the total amount of assets owned by the business like machinery, land, building etc. whereas the total liabilities indicate debt position of the firm. The profit earned by the business is categorized under the heading reserves and surplus on the liability side of the balance sheet. In short liabilities means how the company owes to the outsiders and assets show much the company owns.

The system of accounting is very useful to the small business concern also because it determines the value of the business. In this way, by maintaining books of accounts every year and preparing financial statements at theend of every year, the proprietor can study the factors that increase the profitability of the firm and expenses that obstruct the earning capacity. Corrective actions can be undertaken to increase the earning capacity of the business. A small business concern of today may be converted into a large business house tomorrow. But this process is not fast like the horses gallop.

A firm has to discover its potentialities and weakness by deeply and continuously studying the nature of the firm. If it systematically preserves the record of financial statements every year and accordingly takes corrective measures against weak spots existing then surely year after year they will earn higher profit every after year. As Rome was not built in a day no business concern

Following are the Functions of Accounting:

1. It maintains systematic record of the financial transactions, posts them into ledger and ultimately prepares final statements.

2. The next important function of accounting is that it protects the property of the business. If the company does not maintain record about the investments made in purchasing assets then it will spend irrationally and thus bring itself to the threshold of insolvency. Also, when final accounts are prepared the assets that are purchased are recorded on the assets side of the balance sheet. The statements are considered to be the legal documents because they are sealed by the legal departments. In this way an outsider who reviews the statements understand that the firm has purchased the respective asset. Even a small business firm should comply with the formalities as per legal norms and economic policies if the turnover exceeds a certain limit.

3. Accounting aims at fulfilling the legal requirements because they need to file various statements such as income tax, sales tax and so on.

4. The accounting statements communicate the results to the interested parties like proprietors, investors, creditors and researchers.

The following are the groups interested in acquiring information relating to business:

1. Owner: He starts business with the objective of earning profit. Therefore he is naturally interested to know the information disclosed by the accounting records. He would want to know the various types of sources of income and the pattern of expenditure. It is essential to know the nature and value of the liabilities because prompt payments must be made to the creditors.

Creditors: they are the persons who have advanced some amount of money to the business and would want to know how promptly the firm will be able to pay them. They would constantly want to know the progress of the concern because it reflects their ability to repay.

Employees: they depend upon the firm for the livelihood. They will like to know the position of the business because they must regularly earn their income. Besides they must thoroughly know the financial position of the business because they are working for the firm.

Government: legal bodies like income tax department or sales tax department collect tax from the firm and therefore expect systematic records of statements that are duly attested.

Researchers: they would determine the status of the business in the due course of time

After the process of book keeping the proprietor of the business is interested in determining the two important points:

1. The amount of profit earned during the year

2. What is the exact position of the business at the end of the year

To determine the profit earned or loss incurred during the year he will prepare trading and profit loss account. To know the position of the business at the end of the year he will prepare balance sheet.

The trading and profit and loss account is the summary of the accounts that affect the profit or loss of the concern. It displays the list of items that increase revenue and give rise to expenditure. The balance is either net profit or net loss. The items that are included in the statement are routine in nature. They are non-recurrent.

Balance sheet has two aspects: Assets and liabilities: Assets are the properties owned by the business and they are durable in nature. For Eg: Furniture once purchased is useful for many years and new set of furniture need not be purchased for a long time. Liabilities generally are the payments that should be made to the outsiders or employees. They include items like secured and unsecured loan, bills payable, salary payable and provisions.

The asset side of the balance sheet is divided into categories like fixed asset, current asset, investment loans and advances and preliminary expenses. Current assets includes bills that are yet receivable, cash in hand, closing stock etc.

Accounting reflects the financial position of the business and is essential to small business concerns also. Even a small business concern would want to constantly know the financial status of the business and therefore keep a track of financial records regularly. Without accountancy the firm will forget the transactions that occur and therefore would be completely blank about the position of their own entity.