What Are The Objectives And Purpose of Accounting?


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.

Permanent Record

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.

Measuring Outcome

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.

Measuring Creditworthiness

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.


What Are The Types Of Accounting?

The Seven Main Types Of Accounting

Accounting is a profession that is very broad and dynamic; it has to be constantly changing to fit the various and specific needs of those who use it. There are quite a few different types of accounting aimed to supply the specific requirements for the variety of accounting users.


Here are the main types of accounting and a brief explanation of each:

1. Financial Accounting

Financial Accounting also known as Financial Reporting is the process in which information for external users is produced; this can be done in the form of financial statements. A financial statement will reflect the past performance and current position of an entity based on a fixed set of guidelines and standards called Generally Accepted Accounting Principles (GAAP).

2. Management Accounting

Management Accounting is information which is produced by the company’s management for internal use. The internal information is more accurate than the external information; the purpose is to have more efficient control over the organization as well as a way to reach individual strategic goals and objectives the company has in place. The information provided is a forecast or budget. A branch of Management Accounting is Cost Accounting, this involves using certain techniques as of form of monitoring and controlling costs.

3. Governmental Accounting

Governmental Accounting also known as Federal Accounting or Public Accounting, this type of accounting information system is the one used in the public sector. There is a bit of a difference with the Financial Accounting system utilized in the public sector, and that applied in the industry.

4. Tax Accounting

Tax Accounting is for tax-related situations. This industry governed by the specific tax rules instituted by the tax laws of the jurisdiction. These rules are different than the ones who rule over the preparation of the financial statements that are for public use. The financial statements prepared under the principles of financial accounting are adjusted by tax accountants to account for the differences in the rules prescribed by the tax laws.

5. Forensic Accounting

Forensic Accounting uses accounting and auditing as well as investigative methods in cases of dispute or litigation. A forensic accountant will summon an expert in courts of law in both criminal and civil disputes which require analyzing the financial consequences of an inevitable loss as well as to detect fraud. A forensic accountant may need their services in cases of personal injury claims, a complaint involving professional negligence in a financial way, insurance claims, suspected fraud, etc.

6. Project Accounting

Project Accounting is an accounting system which is used to follow the economic progress of a particular project with the use of frequent financial reports as this is a very vital aspect of project management. This management accounting branch is specialized to focus on guaranteeing the financial success of the company’s projects such as opening a new business office.

7. Social Accounting

Social Accounting is also known as Sustainability Accounting and Corporate Social Responsibility. Considered a sector that focuses on reporting implications of company activities on its social and ecological environment. This form of accounting reported with the use of Environmental Reports which accompany the companies annual reports. This type of accounting is relatively new and is considered to be due to the environmental consciousness which seems to be growing with the general public.

These are the seven main types of accounting. The accounting services you or your company may need could vary depending on each situation, it is best to look for the advice of a tax consultant and see which accounting services would help you and your company the most and which ones are an absolute must.…