Objectives and Basic Concepts of Accounting

Accounting Maintains Systematic Records

The core objective of accounting is to record financial transactions like cash payments and cash receipts, purchase and sale of goods, etc. systematically

Basic Concepts of Accounting

In business, many transactions take place in a day. It is impossible to remember all transactions; hence, there is a need to record them. If you were asked to purchase several items and given $10,000, you will find it difficult to remember the details of various items purchased by you. So you must write it in a notebook or a piece of paper. In business, there are hundreds and thousands of transactions are taking place in a day. It becomes practically impossible to remember all those transactions.

Unless you record them properly, it will be difficult for you to determine the source of income and expenditure which makes it difficult for you to analyze the performance of your business. If you are supplying your goods on credit, you need to record the transactions. Otherwise, it will be challenging for you to determine the amount to be received by you. You need to record the transactions of goods received to ascertain the amount you owe to your supplier at a given point in time. For controlling your business properly, you have to record all the transactions systematically. Accounting serves the purpose of recording the transaction systematically.

Accounting helps the businessman to record all transactions of his business. By recording the transactions, the businessman will be able to ascertain whether there is a profit or loss at the end of a particular period. He can also communicate this information to the parties interested in his business such as his partners, investors, bankers who lend capital, and the government who claim tax on his profit, etc.

Whichever the form of business organization – a co-operative society, a sole proprietorship, a company, or a partnership – it has to maintain proper accounts. For decision making, planning, and controlling the business, management depends on accounting. Banks and creditors look at the financial results to determine the creditworthiness and the government looks at the financial results for the tax purpose.

Accounting is necessary not only for business organizations but also for non-business organizations like clubs, charitable societies, hospitals, schools, colleges, churches, and religious organizations.

Let us look at the core concepts employed in the double-entry method of bookkeeping. Altogether it is the debiting and crediting of amounts into the various accounts.

Objectives of Accounting

To Maintain Systematic Records: The core objective of accounting is to record financial transactions like cash payments and cash receipts, purchase and sale of goods, etc. systematically. Besides, it performs the function of recording assets and liabilities of the business properly.

To Ascertain the Net Profit or a Net Loss of the Business: A businessman is interested in knowing the result of his business. Whether it is making a profit or a loss? If it is making a loss, why? Which operation is to be monitored closely, etc? A proper record of receipt and payments can reveal whether the business is making a profit or loss. So, one of the objectives of accounting is to ascertain the net result of the business operation. To find out whether it is making a profit or loss.

To Ascertain the Financial Position of the Business: Another objective of accounting is to find out the financial position of the business. How much money is earned during the year? What are the assets? What are the liabilities? What is the position of the stock of finished goods and raw materials? The difference between the assets and liabilities is the net financial position of the business. By recording transactions, investments, assets, and liabilities in monetary terms, the businessman would be able to report the financial position of the business. A systematic record of assets and liabilities helps the preparation of a position statement called the Balance Sheet, which provides the financial position of the business.

To Provide Accounting Information to the Interested Parties: There are other external parties like bankers, investors, creditors, tax authorities, prospective investors interested in knowing the financial information of the business. They need it to ascertain the profitability and financial health of the business. This information can be communicated to the interested parties through the annual report of the company. Proper and systematic accounting helps the accountants or auditors to prepare such an annual financial report of the company.