3. Objectives of Accounting

OBJECTIVES OF ACCOUNTING

Objective of accounting may differ from business to business depending upon their specific requirements. However, the following are the general objectives of accounting.

• Keeping systematic record.

          Accounting is used for the maintenance of a systematic record of all financial transactions in book of accounts. A proper and complete records of all business transactions are kept regularly. Moreover, the recorded information enables verifiability and acts as an evidence.

• Ascertain the results of the operation.

         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 profitsor 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 Rs 6,00,000 and total expenses are Rs. 5,40,000 the profit will be equal to Rs. 60,000(Rs. 6,00,000 – Rs. 5,40,000).

If however, the total expenses exceed the total revenue, the difference reflects the loss.

• Ascertain the financial position of the business.

              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.

• Portray the liquidity position.

             Accounting liquidity measures the company’s debtor’s ability concerning their debt payments. The same is usually expressed in terms of the percentage of the current liabilities.

• To provide information to various parties.

             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).

• To facilitate rational decision – making.

            Accounting records andfinancial statements provide financial information which help thebusiness in making rational decisions about the steps to be taken inrespect of various aspects of business.

         

• To satisfy the requirements of law

            entities such as companies, societies, public trusts , are compulsorily required to maintain accounts as per the law governing their operations such as companies act, trust act, societies act etc. Maintenance of Accounts is also compulsory under sales tax act and income tax act. 

Objectives of Accounting

The job of an accountant is to be able to maintain a systematic record of financial information namely journal ledger profitability and financial position

We have been introduced to the journal and ledger above in the definition of accounting

1. The major objective of books of accounts accountancy is to calculate the profit earned or loss suffered in a given year. This is calculated by preparing a profit and loss account which you will learn in the course of this year
2. Another important aspect of the objectives of accounting is to determine the financial position at the end of every year that is assets liabilities and capital at the end of the year.

Proper maintenance of books of accounts assists the management in planning and decision-making throughout the lifetime of the business

Note for students.
(As accounts students it is very important for us to understand the meaning of certain words.)
Quantitative
Quantitative data is something that is a number based which can be measured which can be counted. 

For example how much salary does a CA make in a year?

Qualitative
Qualitative data relates to other than numbers characteristics.

For example, is the CA a girl or a boy
Is the CA hard working employee or a lazy one

OBJECTIVES OF ACCOUNTING

• Objective of accounting may differ from business to business depending upon their
• specific requirements. However, the following are the general objectives of accounting.
• Keeping systematic record.
• Ascertain the results of the operation.
• Ascertain the financial position of the business.
• Portray the liquidity position.
• To provide information to various parties.
• To facilitate rational decision – making.
• To satisfy the requirements of law

ACCOUNTING

• The object of accounting is to record, classify, summarize, analyze, and interpret the business transactions and ascertain financial results and to communicate to various parties.
• It has a wider scope.
• It is concerned with all levels of Management.

ADVANTAGES OF ACCOUNTING

• Replacement of memory
• Evidence court
• Assessment of taxation liability
• Comparative study
• Sale of business
• Assistance to the insolvent person
• Assistance to various parties
• Facilities in raising loans
• Information regarding financial position.

LIMITATIONS OF ACCOUNTING

• Records only monetary transactions.
• Unsuitable for forecasting.
• No realistic information
• Personal bias of the accountant affects the accounting statements .
• Incomplete information.
• Profit no real test of managerial performance .
• Historical in nature.
• Window dressing in balance sheet.