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Objectives and Basic concepts of accounting

Updated on November 11, 2013

Basic concepts of accounting

In business many transactions take place in a day. It is impossible to remember all transactions; hence there is the need to record them. If you were asked to purchase a number of items and given $10000, you will find it difficult to remember the details of various items purchased by you. So it is necessary for you to write it in a note book or a piece of paper. In business there hundreds and thousands of transactions are taking place in a day. It becomes almost 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 make it difficult for you to analyse the performance of your business. If you are selling your goods on credit, it is important for you to record the transactions. Otherwise it will be difficult 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 of 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 business man to record all transactions of his business. By recording the transactions, businessman will be able to ascertain whether there is 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 the purpose of decision making, planning and controlling the business, management depends on accounting. Banks and creditors look at the financial results to determine the credit worthiness. Government look 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 organisations.

Let us look at the basic concepts used in the double entry method of book keeping. Simply it is the debiting and crediting amounts in to the different accounts.

Objectives of accounting

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

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

To ascertain financial position of the business: Another objective of accounting is to find out the financial position of the business. How much money it 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 are the net financial position of the business. By recording transactions, investments, assets, and liabilities in monetary terms, the businessman would be able to tell the financial position of the business. A systematic record of assets and liabilities help the preparation of position statement called 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 are 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 financial annual report of the company.



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