Objective of Accounting
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Sanjoy19
July 9, 2020
American Institute of Certified Public Accountants (AICPA) formed the
“Trueblood Committee” for ascertaining the objects of accounting. On the basis of the
recommendations of this committee, the Financial Accounting Standards Board (FASB)
of AICPA issued a Memorandum in 1974, accounting for which the objective of
accounting may be classified as (A)Primary Objective and (B) Secondary
Objective.
Accounting function and objective of accounting a lot like that.
A. Primary Objective of accounting :
i. Provide necessary information to interested parties: Usually accounting
information is needed by (a) Internal management and (b) Outsiders. The internal
management requires accounting information for making economic decisions and
framing policies.
The outsiders may be employees, investors, money lenders, suppliers, customers,
Government, public etc. Each of them requires specific information that is provided by
accounting.
ii. Ascertain trading results of a concern: Through regular maintenance of
periodic profit and Loss Account or Revenue Statements, accounting gives ides of
operational profit and loss of a concern.
iii. Ascertain the financial affairs of a concern: Accounting deigns to compute the
values of assets and liabilities of a concern on a particular date. This gives an idea of the
financial strength or weakness of the concern.
B.Secondary Objective of accounting:
The secondary objective actually emerges from the primary objectives of accounting.
These may include (i) the detection of weakness in management. (ii) the suggestion of
means of reasonable distribution or use of limited wealth etc.
In his book “Introduction to Management Accounting “ Charles Horngreen observed
that accounting should aim :
i. To provide necessary information for effective planning and control.
ii. To provide information for special decision making and control.
iii. To provide information to outsiders.
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An overview of the objective of accounting is depicted in the chart given
below:
objectives-of-accounting
Discuss the details of the Objective of Accounting Class 11 and
all :
The objectives of accounting can be given as follows:
1. Maintaining systematic Records of Transactions:
The objective of accounting is to record financial transactions and events of the
organization in the book of account in a systematic manner, classifying the recorded
data under the appropriate account and summarizing them into financial statements i.c,
income statement and position statement.
To ensure reliability and precision for the accounting measurements, it is necessary to
keep a systematic record of all financial transactions of a business enterprise which is
ensured by bookkeeping.
These financial records are classified, summarized, and reposted in the form of
accounting measurements to the users of accounting information i.e; stakeholder.
2.Ascertaining Profit or Loss:
The objective of accounting is to ascertain the net result of day-to-day transactions
for the period or to ascertain whether during the accounting period the firm earned a
profit or incurred a loss. For this purpose, a statement called an income statement or the
trading and Profit and Loss account is prepared.
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In this account, the revenues resulting from the transaction of the accounting period
and the expenses incurred are recorded.
A comparison of the two shows whether the business earned a profit or incurred a loss.
Profit and Loss is a core accounting measurement. It is measured by preparing profit
and loss account for a particular period.
Various other accounting measurements such as different types of revenue expenses
and revenue incomes are considered for preparing this profit and loss account.
The difference between this revenue income and revenue expenses is known as a result
of business transactions identified as profit and loss. As this measure is used very
frequently by stockholders for rational decision making, it has become the objective of
accounting.
3.Ascertaining Financial Position:
It is also necessary to know the financial position of the organization. Financial
position is another core accounting measurements. Financial position is identified by
preparing a statement of assets, liabilities and the owner’s capital is prepared.
Such a statement is called a balance sheet. The balance sheet is a statement of assets
and liabilities of the business at a particular point in time and helps in ascertaining the
financial health of the business.
Various other accounting measurements such as different types of assets and different
types of liabilities as existed at particular data are considered for preparing the balance
sheet. This statement may be various stakeholders for financing and investment
decisions.
4.assisting the management:
The management often requires financial information for decision-making, effective
control, budgeting, and forecasting. Accounting provides financial information to assist
the management in discharging this function.
5.Communication Accounting Information to Users:
Another objective of accounting is to provide accounting information to users who
analyze them as per their individual requirements.
The accounting process is involved in generating the accounting information, which is
communicated to the interested users, belonging to different users such as investors,
management, suppliers and creditors, etc.
6.To know the solvency position:
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The solvency position is another objective of accounting, balance sheet, and profit
and loss account prepared as above give useful information to stockholders regarding
the concerned potential to meet its obligations in the short run as well as in the long
run.
Preparing the balance sheet, management not only reveals what is owned and owed by
the enterprise, but also it gives the information regarding concern’s ability to meet its
liabilities in the short-run (liquidity position) and also in the long-run (solvency
position) as and when they fall due
7. Proving information to the users for rational decision making:
The primary objective of accounting is to provide useful information for decisionmaking to stakeholders such as owners, management, creditors, investors, etc.
Various outcomes of business activities such as costs, prices, sales, volume, value under
ownership, return of investment, etc are measured in the accounting process.
All these accounting measurements are used by stakeholders (owner, investors,
bankers, etc) in the course of business operation. Hence, accounting is identified as the
‘language of business‘.
8.To disclose the liquidity position:
Financial reporting provides information about the liquidity position of an enterprise,
and how it spends the cash, how much cash it borrows and other resource distribution,
and factors that may affect the liquidity and solvency of an enterprise.
9. To fulfill the requirement of Low:
another objective of accounting all the companies, societies, public trusts, etc are
required to maintain accounts as per the low, such companies Act, societies Act, Income
Tax Act, etc. Hence, Business hours keep a record of the financial transactions by the
way of accounting records.
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