What is accounting? Meaning and Objectives of Accounting; Different scholars and Institutes have defined accounting differently. The important among them are as follows: According to Smith and Ashburne, “Accounting is the science of recording and classifying business transactions and events, primarily of a financial character and the art of making significant summaries, analysis and interpretations of these transactions and events and communicating results to persons who must take decisions or form Judgement.” Also learn, The Difference between Revaluation and Realization Account.
Understanding, learn Meaning and Objectives of Accounting.
The Committee on Terminology, appointed by the American Institute of Certified Public Accountants defined accounting as, “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof.”
In fact, this is the popular definition of accounting that outlines fully the very nature and scope of accounting activity. The sum and substance of accounting, thus, is from the recording of transactions to communicating the results thereof to the concerned parties.
Objectives of Accounting:
The following are the main objectives of accounting:
1. To maintain full and systematic records of business transactions:
Accounting is the language of business transactions. Given the limitations of human memory, the main objective of accounting is to maintain ‘a full and systematic record of all business transactions.
2. To ascertain profit or loss of the business:
Business is run to earn profits. Whether the business earned the profit or incurred loss is ascertained by accounting by preparing Profit & Loss Account or Income Statement. A comparison of income and expenditure gives either profit or loss.
3. To depict the financial position of the business:
A businessman is also interested in ascertaining his financial position at the end of a given period. For this purpose, a position statement call Balance Sheet is preparing in which assets and liabilities are shown.
Just as a doctor will feel the pulse of his patient and know whether he is enjoying good health or not, in the same way by looking at the Balance Sheet one will know the financial health of an enterprise. If the assets exceed liabilities, it is financially healthy, i.e., solvent. In the other case, it would be insolvent, i.e., financially weak.
4. To provide accounting information to the interested parties:
Apart from the owner of the business enterprise, there are various parties who are interested in accounting information. These are bankers, creditors, tax authorities, prospective investors, researchers, etc. Hence, one of the objectives of accounting is to make the accounting information available to these interest parties to enable them to take sound and realistic decisions. The accounting information is creating available to them in the form of an annual report.
Also, These Objectives of Accounting is useful!
Every activity that a business firm does must do for a reason and accounting is no exception. Accounting helps the company achieve a myriad of objectives. Here is the list of objectives that accounting helps the company to obtain.
Any business firm needs a permanent record of the transactions that it indulges in. These records could require for the internal purpose, for taxation purpose or for any other purpose. Accounting serves this function. Whenever the organization commits any resource of monetary value either within the firm or outside the firm, a record is creating. This permanent record is held on for years and can retrieve as and when need be.
#Measurement of Outcome
A business firm may indulge in numerous transactions every day. It may make the profit in some of these transactions while it may make losses in some other transactions. However, the effect of all these transactions needs to aggregate over a period of time. There must be daily, weekly and monthly reports which provide information to the organization about how well it is performing its activities. Accounting serves this purpose by providing periodic financial statements which help the firm adjust their operations accordingly.
Firms need resources for their functioning. They do not have any capital stock at hand and need to obtain them from investors. Investors will give money to the firm only if they have reasonable assurance that the firm will able to generate enough profit. Past accounting records help a great deal in proving this. All kinds of investors from banks to shareholders ask for past accounting details before they trust the management with their money.
#Efficient Use of Resources
Firms can also conduct useful internal analysis with the help of accounting data. Accounting records tell the firm what resources were commits to what activity and what time. These records also summarize the return that was obtained from these activities. Management can then analyze past behavior and draw lessons about how they could have performed better and used resources more efficiently.
Accounting helps management and investors look forward. Costs and revenue growths can project after substantial data has been accumulating. The assumption made is that the company is likely to behave exactly as it has done in the past. Thus, analysts can make reasonable assumptions about the future based on the past record.
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