Objectives of Accounting

Objectives of Accounting

Every activity that a business firm does must be done for a reason and accounting is no exception. Accounting helps the company achieve a myriad of objectives. Here is the list of objectives that accounting helps the company to obtain.

• Permanent Record

  Any business firm needs a permanent record of the transactions that it indulges in. These records could be required for internal purpose, for taxation purpose or for any other purpose. Accounting serves this function. Whenever the organization commits any resource of monetary value either within the firm or outside the firm, a record is made. This permanent record is held on for years and can be retrieved as and when need be.

• Measurement of Outcome

  A business firm may indulge in numerous transactions every day. It may make profit in some of these transactions while it may make losses in some other transactions. However, the effect of all these transactions needs to be aggregated over a period of time. There must be daily, weekly and monthly reports which provides information to the organization about how well it is performing its activities. Accounting serves this purpose by providing periodic financial statements which help the firm adjust their operations accordingly.

• Creditworthiness

  Firms need resources for their functioning. They do not have any capital stock at hand and need to obtain them from investors. Investors will give money to the firm only if they have reasonable assurance that the firm will be able to generate enough profit. Past accounting records help a great deal in proving this. All kinds of investors from banks to shareholders ask for past accounting details before they trust the management with their money.

• Efficient Use of Resources

  Firms can also conduct useful internal analysis with the help of accounting data. Accounting records tell the firm what resources were committed to what activity and what time. These records also summarize the return that was obtained from these activities. Management can then analyze past behavior and draw lessons about how they could have performed better and used resources more efficiently.

• Projections

  Accounting helps management and investors look forward. Costs and revenue growths can be projected after substantial data has been accumulated. The assumption made is that the company is likely to behave exactly as it has done in the past. Thus, analysts can make reasonable assumptions about the future based on the past record.