Accounting is necessity while Auditing is luxury.

(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, accounting 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. it gives an idea of assets and liabilities of the business. Thus, 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.

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

Whether Auditing is a Luxury ?

(1) For a small business, the businessman himself is the owner, manager and accountant. He himself purchases the 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 transactions 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 entrusted 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 is 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

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