Objectives of Accounting

Table of Contents

The process of recording a business’s financial transactions is called accounting. Accounting involves summarizing, analyzing, and reporting transactions to oversight agencies, regulatory agencies, and tax collection agencies. There are two types of accounting – Financial Accounting and Managerial Accounting. Accounting is primarily used to record and report the financial performance of an organization. Along with this some of the other objectives of Accounting are described below.

What are the Objectives of Accounting

1. To keep Records
2. To Analyze and determine financial results
3. To Analyse financial status of affairs
4. To make Decisions
5. To uderstand the Liquidity position
6. To Secure the better financial status in the market
7. To enhance Accountability of the firm
8. To support Legal Needs
9. To Detect and prevent frauds
10. To establish values and responsibility

Now lets go through each points of the Objectives of Accounting in detail.

1. To keep Records

In accounting, financial transactions must be identified and separated out so they can be recorded in books of accounts systematically. As a result, financial transactions are recorded and acknowledged honestly. A general journal is always maintained to record all transactions and later ledger accounts are always maintained to preserve them permanently.

Keeping a record of all financial transactions is the primary function of any accounting department. Maintaining a systematic record will ensure a proper level of analysis to determine an organization’s financial status. Accounting is only effective if it keeps systematic records. This will help analyze decision-making in a systematic and accurate manner. A proper record forms the backbone of any organization and must be in place before you can achieve any other objectives of accounting or any other section.

2. To Analyze and determine financial results

When it comes to your business, you would want to know how your financial health stands at the end of a particular period. Most businesses prefer quarterly results of their operational finances. Using the records that the accounts department has kept for the period, it generates the income statement to calculate the profit and loss details of the company. The process is ongoing and does not cease at the end of the period.

In order to evaluate a business, one must go beyond simply determining its profit or loss. It is also necessary to determine the business’ financial health. After preparing the Profit and Loss Account, a statement called a ‘Balance Sheet’ is prepared, showing the assets and their values on the one hand, and the liabilities and capital on the other hand. Balance Sheets are statements that list the assets and liabilities of a business at a specific date. Financial health of a firm can be assessed by examining the balance sheet.

3. To Analyse financial status of affairs

The accounting function is also responsible for establishing the financial standing of the organization. These include debts, liabilities, property, and assets. Accounts should provide up-to-date information on the financial conditions of the enterprise on a regular basis.

Ideally, the balance sheet should provide this information. It will give an overview of the financial situation of the organization at any given time. Making future decisions & setting goals will be easier with the balance sheet. This is because it will help determine the financial situation of the company.

4. To make Decisions

Accounting information and financial reports can be challenging or confusing. However, data is an essential part of running a business, especially when you need to make big decisions. A two-way relationship exists between accounting information and decision making. Without all of the necessary accounting information, you (or someone else) cannot make decisions.

Despite the fact that financial reports and accounting can seem time-consuming and confusing, they are vital for running a business. It is especially important for you to have accounting data when you need to make big decisions because it will guide you to choose the best option.

How Accounting helps in Decision Making?

a. Decision regarding Business loans

Whether a business is brand new or established, they may consider getting a loan to grow. If you are starting a business or expanding an existing one, you will need financial backing. Accounting plays a crucial role in this process. Accounting information can help you determine if your business has enough cash to fund its own ventures or if it needs to borrow money to do so. To determine if you’re a viable candidate for a loan, lenders also need your accounting information. You must show them you will be able to pay back the money you borrow plus the interest.

In order to determine your eligibility for a loan, creditors need your financial information. For instance, lenders may decide not to lend to you if your accounting information is poor, if you have no money or collateral, or if you already have debt. Accounting information is essential to this decision.

The financial documents you’ll need for business loans include:

Income statements
Cash flow statements
Business tax returns
Balance sheets

b. Decision Regarding Business operations

You can use accounting to make better decisions about your general day-to-day operations. You can analyze your current processes and procedures by assessing your accounting information. To find out if you are keeping up with industry standards, you can compare your financial statements. In that case, you will have to make necessary changes to your operations in order to increase their efficiency.

In addition to the profit of your business, accounting information also shows how high the return on investment is (your return on investment). Making a lot of sales does not always translate to a profit for your business. Your sales revenues may be cancelled out if you have a lot of debt to pay off. The importance of accounting lies in seeing how well your assets (things of value to your business) are utilized to create the products or services you offer. A company’s profit margin can be calculated by comparing its cost of sales to its profit margin.

c. Decisions related to Investments

Investors who purchase shares in a limited company by shares can receive dividends from your profits. Potential investors use accounting to decide whether to invest in your company – and how much to invest. Accounting information is used by investors to determine the value of your company, while credit analysis is used to evaluate whether you can offer a fair return on investment. By showing your company’s financial health, accounting helps investors make informed decisions.

For example, investors may request to see your income statement, which gives them an idea of what income you bring in and whether it is consistent. Investors may decide to invest in your company if you show a steady income. A business’ accounting shows investors how much they can profit and how much they can lose by investing.

d. Decisions related to Budgeting

It is vital that businesses have a budget to avoid overspending and wasting money on non-essential expenses. Using your budget can also help you figure out if the expenses you’ve incurred in the past were necessary so that you can offer your products or services.

Accounting data provide you with information about where your money is being spent, so you can make informed decisions. Make sure you use accurate, complete and up-to-date financial information when preparing your budget. This can be done with accounting.

You will need the following documents to prepare your budget:

Accounts receivable
Accounts payable
Beginning balances
Balance sheet
Profit and loss

It will be easier for you to make decisions if you have these documents at your disposal when writing your budget

e. Marketing

To attract more clients and customers, businesses need to publicize their offerings. Advertising and marketing are essential costs to advertise your business. Marketing and advertising expenses are calculated using accounting. You can also determine how much you earned from those campaigns using the financial data.

It may be necessary to focus on other initiatives if, for instance, you spend a specific amount on an advertising campaign but don’t notice any significant impact on web traffic and sales. Alternatively, the campaign itself may have generated a huge increase in sales, but cost more than the revenue it generated. Accounting helps businesses define and manage their financial health, and therefore assists in decision-making. Whether you’re taking out a loan or marketing your business, you need accounting to make informed financial decisions.

5. To uderstand the Liquidity position

Accounting must also ensure that it has a thorough understanding of the liquidity status of the organization. When accounting is done improperly, it often leads to financial mismanagement in an organization, which leads to huge problems like lockouts and business closures.

Accountants need to keep proper accounting records so that managers and business owners are able to determine how much cash and other resources they have available to fulfill their financial commitments. Liquidity will also be useful in calculating the amount of working capital and capital that can be utilized to pay off liabilities.

6. To Secure the better financial status in the market

Accounting should play a major role in helping the organization find a position in the market. In order to reach this goal, there are a number of financial statements available. When an organization has a strong financial position, it will ideally help enhance its financial status.

An organization can assess its financial condition through financial statements.
Raising capital to conduct a business is essential for an organization.
The amount of money raised by this capital, which is used for business operations, is vital.
A complete balance sheet displaying cumulative profits or losses of the organization.
The organization’s liabilities. These are the amounts the company owes others.
Amounts of cash, inventory, machinery, property, and other assets owned by the organization.
A healthy picture of the organization can be provided by accounting by managing and maintaining all these statements.

7. To enhance Accountability of the firm

Accounting can enhance the accountability of the firm to the fullest extent possible as one of its most important objectives. For the assessment of the actual performance of an organization over a period of time, it is the accounting section of the organization that provides a solid foundation for this assessment.

As a result, the multiple tiers of the organizational hierarchy will also promote accountability in the long run. Shareholders can also benefit from financial statements from the accounting department. Shareholders can hold directors and promoters accountable for poor performance if they are presented with financial statements. Having this information handy if you plan on funding a new project is also helpful. Your financial status can help you get financing through loans or from investors if you have a creditworthy and reliable financial standing.

8. To support Legal Needs

In support of the organization’s financial status, accounting can also serve as legal support. A fundamental objective of accounting is to make sure that an organization’s legal needs are met.

According to legislation around the world, accounting has become a legal requirement. Businesses have a legal obligation to manage and maintain a financial record of the transactions over a specified period and to share this information with shareholders, promoters, and regulatory agencies. As well as this, proper accounting can also assist you in determining your financial rights, obligations, and liabilities in a positive manner.

9. To Detect and prevent frauds

Business failures or losses can be brought about by financial mismanagement and fraud. Accounting’s main objective is to prevent frauds and mismanagement through a record of actual transactions.

You can be confident that no employee of your company will engage in any fraudulent financial activity when the records are accurate and authentic. Accounting will ensure that the incidence of fraud is virtually eliminated by bringing transparency into the transactions of the firm.

10. To establish values and responsibility

Establishing values and responsibility is one of the goals of accounting. Developing moral character is an important goal of accounting. Keeping accurate accounts will strengthen the values of those in charge, as well as the sense of responsibility. Values and responsibility are not defined if people are not held accountable. A better character can only be formed on the basis of values.

In other words, accounting contributes significantly to the creation of ethical and responsible values. Additionally, various financial records and books of accounts are used by the company for various purposes. This documentation is used for future reference.

The cost of a product is taken into account when determining a product’s price; when applying for a loan from a bank or financial institution, different accounting statements need to be provided; etc. Accountants allow for frugal living, effective resource use, cost management, and waste reduction through proper accounting.

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Smirti

(Founder of Management Notes)
MBA,BBA.

I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.

I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,

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