Objective of Accounting

Objective of Accounting accountingrevenue.com/objective-of-accounting.html Sanjoy19

July 9, 2020

American Institute of Certified Public Accountants (AICPA) formed the “Trueblood Committee” for ascertaining the objects of accounting. On the basis of the recommendations of this committee, the Financial Accounting Standards Board (FASB) of AICPA issued a Memorandum in 1974, accounting for which the objective of accounting may be classified as (A)Primary Objective and (B) Secondary Objective.

Accounting function and objective of accounting a lot like that.

A. Primary Objective of accounting : i. Provide necessary information to interested parties: Usually accounting information is needed by (a) Internal management and (b) Outsiders. The internal management requires accounting information for making economic decisions and framing policies.

The outsiders may be employees, investors, money lenders, suppliers, customers, Government, public etc. Each of them requires specific information that is provided by accounting. ii. Ascertain trading results of a concern: Through regular maintenance of periodic profit and Loss Account or Revenue Statements, accounting gives ides of operational profit and loss of a concern. iii. Ascertain the financial affairs of a concern: Accounting deigns to compute the values of assets and liabilities of a concern on a particular date. This gives an idea of the financial strength or weakness of the concern.

B.Secondary Objective of accounting: The secondary objective actually emerges from the primary objectives of accounting.

These may include (i) the detection of weakness in management. (ii) the suggestion of means of reasonable distribution or use of limited wealth etc.

In his book “Introduction to Management Accounting “ Charles Horngreen observed that accounting should aim : i. To provide necessary information for effective planning and control. ii. To provide information for special decision making and control. iii. To provide information to outsiders.

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An overview of the objective of accounting is depicted in the chart given below:

objectives-of-accounting

Discuss the details of the Objective of Accounting Class 11 and all : The objectives of accounting can be given as follows:

1. Maintaining systematic Records of Transactions: The objective of accounting is to record financial transactions and events of the organization in the book of account in a systematic manner, classifying the recorded data under the appropriate account and summarizing them into financial statements i.c, income statement and position statement.

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; stakeholder.

2.Ascertaining Profit or Loss: The objective of accounting is to ascertain the net result of day-to-day transactions for the period or to ascertain whether during the accounting period the firm earned a profit or incurred a loss. For this purpose, a statement called an income statement or the trading and Profit and Loss account is prepared.

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In this account, the revenues resulting from the transaction of the accounting period and the expenses incurred are recorded.

A comparison of the two shows whether the business earned a profit or incurred a loss.

Profit and Loss is a core accounting measurement. It is measured by preparing 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 this revenue income and revenue expenses is known as a result of business transactions identified as profit and loss. As this measure is used very frequently by stockholders for rational decision making, it has become the objective of accounting.

3.Ascertaining Financial Position: It is also necessary to know the financial position of the organization. Financial position is another core accounting measurements. Financial position is identified by preparing a statement of assets, liabilities and the owner’s capital is prepared.

Such a statement is called a balance sheet. The balance sheet is a statement of assets and liabilities of the business at a particular point in time and helps in ascertaining the financial health of the business.

Various other accounting measurements such as different types of assets and different types of liabilities as existed at particular data are considered for preparing the balance sheet. This statement may be various stakeholders for financing and investment decisions.

4.assisting the management: The management often requires financial information for decision-making, effective control, budgeting, and forecasting. Accounting provides financial information to assist the management in discharging this function.

5.Communication Accounting Information to Users: Another objective of accounting is to provide accounting information to users who analyze them as per their individual requirements.

The accounting process is involved in generating the accounting information, which is communicated to the interested users, belonging to different users such as investors, management, suppliers and creditors, etc.

6.To know the solvency position:

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The solvency position is another objective of accounting, balance sheet, and profit and loss account prepared as above give useful information to stockholders regarding the concerned potential to meet its obligations in the short run as well as in the long run.

Preparing the balance sheet, management not only reveals what is owned and owed by the enterprise, but also it gives the information regarding concern’s ability to meet its liabilities in the short-run (liquidity position) and also in the long-run (solvency position) as and when they fall due

7. Proving information to the users for rational decision making: The primary objective of accounting is to provide useful information for decisionmaking to stakeholders such as owners, management, creditors, investors, etc.

Various outcomes of business activities such as costs, prices, sales, volume, value under ownership, return of investment, etc are measured in the accounting process.

All these accounting measurements are used by stakeholders (owner, investors, bankers, etc) in the course of business operation. Hence, accounting is identified as the ‘language of business‘.

8.To disclose the liquidity position: Financial reporting provides information about the liquidity position of an enterprise, and how it spends the cash, how much cash it borrows and other resource distribution, and factors that may affect the liquidity and solvency of an enterprise.

9. To fulfill the requirement of Low: another objective of accounting all the companies, societies, public trusts, etc are required to maintain accounts as per the low, such companies Act, societies Act, Income Tax Act, etc. Hence, Business hours keep a record of the financial transactions by the way of accounting records.

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