Objectives of Accounting

Primary Objective of Accounting

The primary objective of accounting is to provide a clear picture of an organization’s financial health and performance, which can be used for decision-making, planning, and control.

Secondary Objectives of Accounting

Maintain a Systematic Record of Business Transactions
Accounting is used to maintain a systematic record of all the financial transactions previously occured in the business in a book of accounts i.e. Journal and Ledgers.

To ascertain Profit and Loss
Every businessman is keen to know the net results of business operations periodically. To check whether the business has earned profits or incurred losses, we prepare a “Profit & Loss Account”.

Determine the Financial Position
Determine the financial position of the business means to check the value of assets and liabilities. Balance Sheet is being prepared for this purpose.

Provide Information to various Users
Providing information to the various interested parties or stakeholders is one of the most important objectives of accounting. It helps them in making good financial decisions.

Assist the Management
By analysing financial data and providing interpretations in the form of reports, accounting assists management in handling business operations effectively.

Functions / Activities of Accounting

The objectives, functions, and activities of accounting are not the same, but they are closely related and interconnected, they are distinct concepts that serve different purposes in the accounting process.

The objectives of accounting refer to the overall goals or purposes of accounting. The functions of accounting are the various tasks or activities that accounting professionals perform to achieve these objectives. The activities of accounting are the specific tasks or operations involved in carrying out the functions of accounting or ultimately to achieve its objectives.

The above definitions highlight the various aspects/activities/functions/objectives of accounting as;

• Identification of Economic Events (Transaction)
• Systematic Recording of Financial Transactions
• Classify the Recorded Transactions into Relevant Categories
• Summarize the Classified Transactions
• Reports the Financial Operations in Standardized Formats (Financial Statements)
• Analyze/Interpret the Financial Statements to determine the Performance of the Organization
• Communication: Providing Information to the Relevant Stakeholders for Rational Decision-making

Characteristice of Accounting

The following attributes or characteristics can be drawn from the definition of accounting:

1) Identifying Financial Transactions and Events
Accounting records only those transactions and events which are of financial nature. So, first of all, such transactions and events are identified.

2) Measuring the Transactions:
Accounting measures the transactions and events in terms of money which are considered as a common unit.

3) Recording of Transactions
Accounting involves recording the financial transactions inappropriate book of accounts such as Journal or Subsidiary Books.

4) Classifying the Transactions
Transactions recorded in the books of original entry – Journal or Subsidiary books are classified and grouped according to nature and posted in separate accounts known as ‘Ledger Accounts’.

5) Summarizing the Transactions
It involves presenting the classified data in a manner and in the form of statements, which are understandable by the users. It includes Trial balance, Trading Account, Profit and Loss Account and Balance Sheet.

6) Analyzing and Interpreting Financial Data
Results of the business are analyzed and interpreted so that users of financial statements can make a meaningful and sound judgment.

7) Communicating the Financial Data or Reports to the Users
Communicating the financial data to the users on time is the final step of Accounting so that they can make appropriate decisions.

Importance of Accounting

Accounting is a crucial aspect of any business organization because it helps businesses to;

• Determining Profit & Loss / Financial Position
• Provides Information about Business’s Health & Performance (Profitability, Liquidity, and Solvency)
• Financial Management: Manage their Finances
• Financial Planning & Budgeting: Set and Tracking Their Financial Goals
• Informed Decision Making
• Tax and Legal Compliance
• Stakeholders, Investors & Creditors Confidence

Limitation of Accounting

Following are the limitations of accounting:

• Accounting is not precise: Accounting is not completely free from personal bias or judgment.
• Accounting is done on historic values of assets: Accounting records assets at their historical cost less depreciation. It does not reflect their current market value.
• Ignore the effect of price level changes: Accounting statements are prepared at historical cost. So changes in the value of money are ignored.
• Ignore the qualitative information: Accounting records only monetary transactions. It ignores the qualitative aspects.
• Affected by window dressing: Window dressing means manipulation in accounting to present a more favorable position of the business than the actual position.

Users of Accounting Data

The users of accounting data can be broadly categorized as internal and external users, based on their relationship with the organization. The financial information that users need depends upon the kinds of decisions they make.

There are two broad groups of users of financial information: internal users and external users.

• Internal Users: Owners, Management, Employees
• External Users: Investors, Creditors, Govt. Agencies/Regulators, Customers, Researchers, General Public