Accountancy a necessary, while auditing a luxury.

• ACCOUNTANCY A NECESSARY

                  There prevails a belief that accountancy is inevitable whereas auditing is not so. In other words accountancy is a necessity, while auditing is a luxury. The above belief has not stood the test of time and in the modern age the belief has proved merely an illusory one.whether accountancy is a Necessity?


  Accountancy has rightly been considered to be a necessity. Following arguments may be advanced for this contention :

    1.A businessman cannot remember all transactions of his business. His memory is too limited to keep in mind every detail of day-to-day transactions It is therefore necessary to keep the proper records of these transactions.

 2. Accountancy also helps to know how much and what type of transactions have taken place during a specified period. To know the financial effect of every transaction, accountancy is inevitable.

3. To know figures of sales and purchases for a specified period one has to keep proper accounts. These figures of purchases and sales would ultimately help us to find out the amount of profit or loss of business.

 4. The particulars regarding various types of incomes and expenditure are available with the help of accountancy.

 5. A comparative study of profit or loss for different years is possible. Moreover, accountancy enables to take corrective steps by pointing out where there is a leakage of income or unnecessary expenditure.




 6. Accountancy also reveals what the business owns and what it owes i.e an idea of assets and liabilities of the business. Thus it gives it gives a clear idea of the state of affairs of business.

 7. A comparative study of the composition of various types of assets and liabilities for different years is also possible. Thus the causes for increase or decrease in capital is revealed by accountancy.

 8. The rate of return on capital invested in the business is known through proper accounting.

9. When the business is to be sold or taken over by some other unit, the problem of ascertainment of value of goodwill of the business arises Accountancy helps in computing the value of goodwill of the business at a particular date.

10. Assessment of liability in respect of income-tax, sales-tax étc. is possible with the help of Accountancy.

• WHETHER AUDITING IS A LUXURY? 

   Those who say that auditing is a luxury, put forward the following arguments in their support:

 (1) For a small business, the businessman himself is the owner, manager and accountant. He himself purchases e required quantity of goods and sells the same. It is, therefore not necessary to get the accounts of such business audited Besides, audit is expensive also.


 (2) In several businesses the owner earns huge profit but the transaction in such business may be extremely limited e.g. jewellery business. here the businessman can himself write the books of accounts and hence audit is unnecessary.


(3) Where the audit work is to be entrused to the professional auditors, their fees are obviously more which proves to be burdensome to the small businessman. In such cases the resulting benefit from audit is small as compared to the cost of audit involved.


(4) So far as businessman himself writes the books of accounts, there are no possibilities of fraud or manipulation. In such circumstances audit s not necessary


(5) In course of audit work the auditors will require various explanations Informations, records and registers etc. This will disturb the routine work of business resulting into waste of time of employees and will affect their efficiency adversely.


(6) In many cases, there remain frauds and errors inspite of accounts being audited by the auditor. In many cases, the courts have held that when the auditor exercises reasonable care and skill, he is held not liable for not-detecting the frauds and errors. If this is the position and if the auditor does not guarantee the accuracy of accounts in totality, then there is no meaning of audit. Here audit is a luxury.


 It should be noted, however, that in these days when the business is carried on large scale, the transactions are so voluminous and the tax liability is so high that the above arguments are considered to be fallacious, Now-a-days, the advantages of audit are so well understood and appreciated that it is no more considered to be a luxury but it is considered as a necessity.