Accounting* is the systematic process of recording, classifying, summarizing, and interpreting financial
transactions and information for an individual, organization, or business. It provides a clear picture of
the financial position and performance of an entity, helping stakeholders make informed decisions.
Key Functions of Accounting:
1. *Recording*: Documenting all financial transactions in a systematic manner often referred to as
bookkeeping.
2. *Classifying*: Grouping similar transactions into categories, such as assets, liabilities, income, and
expenses.
3. *Summarizing*: Preparing financial statements like the Balance Sheet, Income Statement, and Cash
Flow Statement to provide a summary of financial activities.
4. *Interpreting*: Analyzing the summarized data to assess financial performance and provide insights
for decision-making.
Objectives of Accounting:
- *To maintain a systematic record of transactions*.
- *To determine profitability* by calculating net profit or loss over a specific period.
- *To show the financial position* through the preparation of the Balance Sheet.
- *To provide information for decision-making* to management, investors, creditors, and other
stakeholders.
Types of Accounting:
1. *Financial Accounting*: Focuses on the preparation of financial statements for external users like
investors, regulators, and creditors.
2. *Managerial Accounting*: Provides internal reports and analysis to help management make
operational decisions.
3. *Cost Accounting*: Analyzes the cost of production and helps in controlling costs.
4. *Tax Accounting*: Deals with preparing tax returns and tax planning.
Importance of Accounting:
- Helps track financial performance and position.
- Facilitates informed decision-making for management and stakeholders.
- Ensures regulatory compliance and aids in tax reporting
- Assists in budgeting, planning, and financial forecasting.
In essence, accounting is the "language of business," providing crucial financial information needed for
effective management and decision-making.
The Objectives of Accounting
The primary objectives of accounting include systematic maintenance of
records of transactions summarising and analyzing business reports to
assess the financial standing of the business entity. The following are the
various objectives of accounting –
Maintaining systematic financial records: One of the most important
accounting objectives is that accounting helps the business organization
keep a systematic and accurate record of the day-to-day transactions,
which helps to understand the working of the business, payments made,
income received, etc.
To estimate and ascertain profits or losses
Recording transactions concerning revenues and expenditures helps us
ascertain the profit/ loss at the end of the financial year. Ascertaining profits
or losses is important to make payments, making it one of the important
objectives of accounting.
Preparing financial reports to assess the financial position
Accounting involves the preparation of a balance sheet which is a record of
the assets and liabilities of a business entity. This helps in the analysis of
the financial position of the business organization. Ascertaining profitability
can help us understand the strengths and weaknesses of the business
organization and formulate various policies and strategies to correct the
weaknesses and improve the organization’s strengths.
Auditing of financial reports
Another objective of accounting is that it helps in understanding the
financial position of a company in the form of assets, debts, profits and
losses, etc. These records are made available to the auditor, who can then
analyses the reports to find any discrepancies and suggest the required
corrective reforms. These reports also help the higher authorities formulate
plans and make rational decisions.
To forecast future payments, expenditures and budgets
Accounting helps to predict the future profitability of a business entity. This
helps plan future payments, debts, expenditures and budgets accordingly.
It also helps in distributing funds among different departments of the
business organization based on past allocations and profitability.
These are a few of the most important objectives of accounting. Once we
understand the objectives of accounting, it becomes easier to understand
the role of accounting.
Function of Accounting :
Accounting functions involve the identification, recording, summarizing of
transactions, analyzing and ascertaining the profit/losses and
communication of the necessary information. Here are a few functions of
accounting –
1-Preparation of budget and cash control
The most important role of accounting, which also helps explain the
objectives of accounting, is the record of transactions to facilitate the
budget and cash control preparation. Cash control is estimating a standard
cost beforehand. Evaluating and comparing the standard and actual costs
incurred can help us analyses and understand the efficiency of the work
undertaken and the corrective measures to be applied to improve
efficiency.
2-Prevention of errors and fraud
Accounting helps in estimating and ascertaining the profits or losses
through a systematic record of all transactions. This helps prevent errors
and fraud like all the transactions, including the employee reports, are
recorded systematically and accurately.
3-Basis of evaluation of performance
Accounting acts as a basis for the evaluation of performance. It helps us
ascertain whether the pre-planned goals are achieved and provides
information regarding the assets and liability situation of the business,
which can be beneficial to evaluate the financial position of the business
organization.
4-Control of fiscal policies of the business
Another important function of accounting is to provide a detailed summary
of reports which ensures strong vigilance, thereby preventing
mismanagement of funds and helps in the control and regulation of the
fiscal policies of the business via proper allocation of the funds.
Importance of accounting:
1-Keeping a record: detection and prevention of fraud
One of the biggest advantages of accounting is how it allows businesses to
keep a systematic record of their financial information. Having up to date
and accurate records is crucial to running a successful business. Without
this information, owners would not know whether they are making a profit.
Keeping accurate records of a business’s finance is also used to detect and
prevent fraud. This is done through internal control, which comes from a
proper record of all business transactions. To do this a business must have
an efficient and effective accounting system.
2-Budget planning
Budgeting is a key factor for any business. Planning a budget allows
businesses to develop strategies, observe expenses and work towards
making a profit. The ability to plan a budget comes from the keeping of
previous records. This is made possible through the collection and
maintenance of financial data by an accountant. With this information,
business owners can form the basis for their planning and budget making.
3-Assisting decision making
Accounting plays a large role in the decision making of a business. The
people involved with planning, organizing and running an organization, use
an accountant’s findings to carry out their roles. Without these numbers,
they would not be able to make the important financial decisions that lead
to a successful business.
Decisions can range from deciding whether to expand their business;
geographical or employment or making changes to how their business runs
in order to see a positive change in efficiency. Without accurate accounting,
business owners would not have factual data to assist their decision-
making process.
4-Statutory compliance
Following laws and regulations is important for business owners and having
a good accounting system ensures they can. Statutory compliance refers to
the laws set out and enforced by the government that businesses and
organizations must adhere to. To ensure these regulations are being
followed, an accountant will address liabilities such as sales tax, pension
funds, income tax, VAT and more.
Failure to record and pay these liabilities in a timely fashion can lead to
fines and possible imprisonment.
5-Evaluate the performance of a business
Financial records help business owners understand what is going on with
their business financially and whether it is performing well. Up to date
records allow business owners to keep track of expenses, find signs of
potential financial loss and compare current data with previous accounting
records.
