Objectives of Accounting

 

Objectives of Accounting

Objectives of Accounting
Objectives of Accounting

As an information system, the basic objective of accounting is to provide useful information to the interested group of users, both external and internal. The necessary information, particularly in case of external users, is provided in the form of financial statements, viz., profit and loss account and balance sheet. Besides these, the management is provided with additional information from time to time from the accounting records of business. Thus, the primary objectives of accounting include the following:

Maintenance of Records of Business Transactions

Accounting is used for the maintenance of a systematic record of all financial transactions in book of accounts. Even the most brilliant executive or manager cannot accurately remember the numerous amount of varied transactions such as purchases, sales, receipts, payments, etc. that takes place in business everyday. Hence, a proper and complete records of all business transactions are kept regularly. Moreover, the recorded information enables verifiability and acts as an evidence.

Calculation of Profit and Loss

The owners of business are keen to have an idea about the net results of their business operations periodically, i.e. whether the business has earned profits or incurred losses. Thus, another objective of accounting is to ascertain the profit earned or loss sustained by a business during an accounting period which can be easily workout with help of record of incomes and expenses relating to the business by preparing a profit or loss account for the period. Profit represents excess of revenue (income), over expenses. If the total revenue of a given period is ₹ 6,00,000 and total expenses are ₹ 5,40,000 the profit will be equal to ₹ 60,000(rs 6,00,000 – ₹ 5,40,000). If however, the total expenses exceed the total revenue, the difference reflects the loss. 

Depiction of Financial Position

Accounting also aims at ascertaining the financial position of the business concern in the form of its assets and liabilities at the end of every accounting period. A proper record of resources owned by business organisation (Assets) and claims against such resources (Liabilities) facilitates the preparation of a statement known as balance sheet position statement.

Providing Accounting Information to its Users

The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs and charts to the users who need it in different decision situations. As already stated, there are two main user groups, viz. internal users, mainly management, who needs timely information on cost of sales, profitability, etc. for planning, controlling and decision-making and external users who have limited authority, ability and resources to obtain the necessary information and have to rely on financial statements (Balance Sheet, Profit and Loss account). Primarily, the external users are interested in the following:

• Investors and potential investors-information on the risks and return on investment;

• Unions and employee groups-information on the stability, profitability and distribution of wealth within the business;

• Lenders and financial institutions-information on the creditworthiness of the company and its ability to repay loans and pay interest;

• Suppliers and creditors-information on whether amounts owed will be repaid when due, and on the continued existence of the business;

• Customers-information on the continued existence of the business and thus the probability of a continued supply of products, parts and after sales service;

• Government and other regulators- information on the allocation of resources and the compliance to regulations;

• Social responsibility groups, such as environmental groups-information on the impact on environment and its protection;

• Competitors-information on the relative strengths and weaknesses of their competition and for comparative and benchmarking purposes. Whereas the above categories of users share in the wealth of the company, competitors require the information mainly for strategic purposes. 

Depiction of Financial Position

Accounting also aims at ascertaining the financial position of the business concern in the form of its assets and liabilities at the end of every accounting period. A proper record of resources owned by business organisation (Assets) and claims against such resources (Liabilities) facilitates the preparation of a statement known as balance sheet position statement.

Providing Accounting Information to its Users

The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs and charts to the users who need it in different decision situations. As already stated, there are two main user groups, viz. internal users, mainly management, who needs timely information on cost of sales, profitability, etc. for planning, controlling and decision-making and external users who have limited authority, ability and resources to obtain the necessary information and have to rely on financial statements (Balance Sheet, Profit and Loss account). Primarily, the external users are interested in the following:

• Investors and potential investors-information on the risks and return on investment;

• Unions and employee groups-information on the stability, profitability and distribution of wealth within the business;

• Lenders and financial institutions-information on the creditworthiness of the company and its ability to repay loans and pay interest;

• Suppliers and creditors-information on whether amounts owed will be repaid when due, and on the continued existence of the business;

• Customers-information on the continued existence of the business and thus the probability of a continued supply of products, parts and after sales service;

• Government and other regulators- information on the allocation of resources and the compliance to regulations;

• Social responsibility groups, such as environmental groups-information on the impact on environment and its protection;

• Competitors-information on the relative strengths and weaknesses of their competition and for comparative and benchmarking purposes. Whereas the above categories of users share in the wealth of the company, competitors require the information mainly for strategic purposes.

 

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