Objectives or Functions 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 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 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 called Balance
Sheet is prepared 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
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 interested
parties to enable them to take sound and realistic decisions. The accounting
information is made available to them in the form of annual report.
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