classmate tells you that she sees no reason to set up accounts in a business. She...

classmate tells you that she sees no reason to set up accounts in a business. She
states that it seems better to simply write the accounting equation at the top of a
sheet of paper and then record each transaction and its effect on the accounting
equation. Explain why this is not practical and why an accounting system will be
needed.

Expert Solution

The Accounting equation is Assets = Liabilities + Equity. Accounting equation helps in ensuring the equation is always balanced with any business transaction. This is simple way of ensuring check on transactions. A business on the other hand practically has huge volume of transactions that cannot be recorded in equation form since it is tedious task and needs more systematic way of recording transactions. Hence maintaining journal and ledger accounts are important to ensure double entry principle is followed and there is flawless preparation of trial balance and then financial statements.

An accounting system is needed for a business due to following reasons

· It helps in handling huge volume of business transactions

· It helps in summarising the business transactions and having an effective control over them

· It helps in periodical Management Information system (MIS ) requirements

· It helps in timely preparation of financial statements

· It helps in supporting other business function like purchase, inventory control , production, maintenance ,etc

ekkarill92 answered 2 years ago

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classmate tells you that she sees no reason to set up accounts in a business. She...

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