Objectives of Accounting: Business is an economic activity undertaken with the motive of earning profits and maximizing wealth for the owners. Business cannot run in isolation. Largely, business activity is carried out by people coming together with a purpose to serve a common cause. This team is often referred to as an organization, which could be in different forms such as sole proprietorship, partnership, body corporate, etc.
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Objectives of Accounting
The rules of business are based on general principles of trade, social values, and statutory framework encompassing national or international boundaries. While these variables could be different for different businesses, different countries, etc., the basic purpose is to add value to a product or service to satisfy customer demand.
(i) Providing Information to the Users for Rational Decision-making
The primary objective of accounting is to provide useful information for decision-making to stakeholders such as owners, management, creditors, investors, etc. Various outcomes of business activities such as costs, prices, sales volume, value under ownership, return on investment, etc. are measured in the accounting process. All these accounting measurements are used by stakeholders (owners, investors, creditors/bankers, etc.) in the course of business operations. Hence, accounting is identified as the ‘language of business’.
(ii) Systematic Recording of Transactions
To ensure reliability and precision for the accounting measurements, it is necessary to keep a systematic record of all financial transactions of a business enterprise which is ensured by bookkeeping. These financial records are classified, summarized, and reposted in the form of accounting measurements to the users of accounting information i.e., stakeholders.
(iii) Ascertainment of Results of the above Transactions
‘Profit/loss’ is a core accounting measurement. It is measured by preparing a profit and loss account for a particular period. Various other accounting measurements such as different types of revenue expenses and revenue incomes are considered for preparing this profit and loss account. The difference between these revenue incomes and revenue expenses is known as a result of business transactions identified as profit/loss. As this measure is used very frequently by stockholders for rational decision-making, it has become the objective of accounting. For example, the Income Tax Act requires that every business should have an accounting system that can measure the taxable income of the business and also explain the nature and source of every item reported in the Income Tax Return.
(iv) To Ascertain the Financial Position of Business
‘Financial position’ is another core accounting measurement. Financial position is identified by preparing a statement of ownership i.e., Assets and Owings i.e., liabilities of the business as of a certain date. This statement is popularly known as a balance sheet. Various other accounting measurements such as different types of assets and different types of liabilities as existed at a particular date are considered for preparing the balance sheet. This statement may be used by various stakeholders for financing and investment decisions.
(v) To Know the Solvency Position
The balance sheet and profit and loss account prepared above give useful information to stockholders regarding concerns potential to meet their obligations in the short run as well as in the long run.
- Providing Information to the Users for Rational Decision-making
- Systematic Recording of Transactions
- Ascertainment of Results of the above Transactions
- To Ascertain the Financial Position of the Business
- To know the Solvency Position
