A Look At The Purpose And Objectives Of Accounting
Accounting is defined as the financial language used to communicate information about an economic entity to users for the purpose of decision making. It is the process where financial information is recorded and summarized to make it more meaningful and useful.
An economic entity is any separately identifiable organization that makes use of resources to achieve its objectives and goals and could be a business operating primarily to make profits, or a non-profit organization carrying out not-for-profit and charitable operations. Be it an entity is working with the aim of making a profit or for charitable causes, the fact remains that any, and all economic entities will rely on accounting to process and provide financial information.
What’s the Purpose of Accounting?
The main purpose of accounting is collecting and reporting financial information about the financial position, performance, and cash flow of an economic entity. The information gathered is then used to make decisions about how to manage the body, invest it, or to lend money to it. The information collected through accounting transactions that record through either standardized business operations like supplier invoices or customer invoicing, or more defined transactions like journal entries.
Once this information has been collected and stored in accounting records, it’s then compiled into financial statements that include the following financial documents:
- Balance sheets
- Income statements
- Statement of retained earnings
- Statement of cash flows
- Disclosures accompanying financial statements
Typically, financial statements are compiled under specific rules known as accounting frameworks – the best known are IFRS or International Financial Reporting Standards, and GAAP or Generally Accepted Accounting Principles. Depending on the particular structure used, the results shown in a financial state can vary. Generally speaking, the framework a business will use will depend on what the financial statement’s recipient wants. As such, European investors will probably require financial statements that are compliant with International Financial Reporting Standards while American investors might want statements that are Generally Accepted Accounting Principles compliant.
An accountant may create special reports for special purposes like determining the revenues a particular sales region generates or profits made on the sale of a product. These reports are considered managerial reports and are not like financial statements that are issued to outsiders.
From what we have gathered here, we can conclude that the main purpose of accounting is collecting and reporting financial information.
What Are The Objectives of Accounting?
Every activity an economic entity engages in is usually done for a reason, and that applies to accounting too. Accounting helps businesses achieve different objectives and here is a look at some them.
Businesses need permanent records of transactions they engage in; this was typically required for taxation purposes, internal purposes, or any other essential purposes. Accounting simplifies things as through it financial information is collected, recorded and stored for future reference.
Businesses engage in many different transactions every single day – on one day, it may make profits while on another, it may make some losses. However, the overall effect of all of the transactions it engages in will need to be aggregated over a specified amount of time. Through accounting, daily, weekly, and monthly reports can be created to provide information on how well a business is performing its activities and how it can adjust its operations to operate profitably.
Businesses need resources to function. Often, most of them don’t have capital stock and have to rely on investors to obtain them. Investors typically give their money to firms that they believe can generate substantial profits. Previous accounting records come in handy when it comes to proving this. Often, you will find that different investors will usually ask for previous accounting records to determine if they can invest in business.
Accounting helps investors and management project the future of a business and how they can chart a way forward. Revenue growths and costs are to be expected once substantial financial information has been collected and recorded. The assumption is that a company is likely to behave as it always has in the past. Through accounting information, analysts can make rational assumptions of how things will unfold in the future based on past records.