Hi Faizan,
Business areas were used in SAP ERP prior to Profit Center Accounting (PCA) to provide departmental reporting analysis. Organizations can use business areas to track postings relating to different parts of business and provide additional analysis.
Business areas functionality has been mostly overtaken by the development of profit centers, internal orders and profitability analysis. However, business area functionality remains in the system. Some organizations may use it to satisfy minor business requirements.
Business area can be used for both balance sheet and profit & loss analysis. But please note an organization can not assign bank, equity or tax information to business area directly. So you can not create legally required financial statements or tax reports using only business areas.
How does business area works.... you will need to setup the business areas in configuration OX03. while entering your documents entries you can select them.
I would suggest that you go through the profit center accounting documentation before making decision. I am sure SAP recommends PCA over business area.
check this out to just understanding how business area works.
http://help.sap.com/saphelp_470/helpdata/en/8e/1a5220171311d28e1d080009b6ab29/frameset.htm
Thanks,
Naseem