Blog #27 - Objectives of accounting : Everything You Need To Know

 

Objectives of Accounting

 

What are the objectives of accounting?

The starting point for any area of study is to set forth its boundaries and determine its objectives. Developments in the field of science and mathematics have brought about a significant change in the field of accounting. The whole concept of accounting has changed. Accounting has to be a versatile system serving a large number of goals of modern business and industries simultaneously. The type of accounting information useful to management in taking decisions is not necessarily the same as is needed by shareholders, prospective investors and creditors. Different accounting principles may be required to meet the several objectives of accounting. 

 

 

The objectives of accounting according to American Accounting Association are:

#01 – Making decisions concerning the use of limited resources including identification of crucial decision area and determination of objectives and goals.

#02 – Effectively directing and controlling the organization’s human and material resources.

#03 – Maintaining systematic records and reporting on the custodianship of resources.

#04 – Facilitating special functions and controls.

 

 

Most Important Objectives of Accounting Are:

 

#01 – To ascertain whether the business operations have been profitable or not:

Accounting helps us to know whether a business has earned profit or suffered loss during the accounting period. It will give us an idea of efficiency of the business. To determine profit or loss of the accounting period, a Trading and Profit Loss account or an income statement is prepared by matching revenues and expired costs incurred for earning revenues. In the process of determination of profit and loss, it is expense or cost that is matched with revenue and not vice versa. Thus, first of all revenue is determined and then expenses incurred for earning the revenue are matched with the revenue for calculating the difference know as profit or net loss.

 

 

#02 – To ascertain the financial position of the business:

Balance sheet or position statement is prepared to give an idea of the financial position of the business on a particular date. The financial position of an enterprise is indicated by its assets on a given date and its liabilities on that date. Excess of assets over liabilities represents the capital and is indicative of the financial soundness of an enterprise. A properly drawn up balance sheet gives information relating to the nature and value of assets, the nature and extent of liabilities, whether the enterprise is insolvent and whether the business concern is over trading.

 

 

#03 – To generate information:

Accounting records generate information which may be helpful to various persons in planning, control, evaluation of performance and decision making.

 

 

 

What are the functions of accounting

To keep systematic record of business transactions, post them to the ledger and ultimately to prepare the final accounts is the first main function of accounting. This is called as Systematic Record Of Business Transactions.

 

For performing this function the accountant is required to devise such a system of recording information so that assets of the business are not put to wrong use and a complete record of the assets of the concern is available without any difficulty. This is called Protecting The Property Of Business.

 

Communicating results to interested parties, this function requires to supply the meaningful information about the financial activities of business to the various parties i.e. owners, creditors, investors, employees, government, public research scholars and the managers at the right time.

 

The accounting system must be such which may be able to comply with legal requirements. Under various enactments a businessman is required to file various statements i.e. Compliance with legal requirements.

 

In case of companies, the management is entrusted with resources of the enterprise. The managers are expected to act as true trustee of the funds and accounting helps them to achieve the same. This is called Stewardship.

Accounting assists the management in planning evaluation of performance, control and decision making by providing required information. 

 

Accounting helps in determination of profitability of different departments of the enterprise and ultimately helps in fixing the responsibility of the departmental heads.

 

 

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