Nature And Purpose Of Accounting

Financial Accounting

THE NATURE AND PURPOSE OF ACCOUNTING

In the present era most of the business as well as non-business operations are carried out through organizations (mostly by limited liability companies (also known as joint stock companies), societies and charitable organisation), rather than by people working as individuals. Such organization consist of group of people working together for common goal. To accomplish its objectives, the organization uses resources -material, labour and various types of services. It is imperative that such work should be carried out in the most effective and efficient manner since resources are both costly as well as scarce. the people in an organization need information about these resources & about the results achieved through using them. Parties outside the organization need similar information in order to make judgements about the organization. The system that provides this information is called accounting.

Organization can be classified broadly as profit oriented or non-profit. As these names suggest, a dominant purpose of organization in the former category is to earn a profit, while organization in the latter categories have other objectives, such as governing, providing health care, providing education, and so on.

Operating Information

A considerable amount of information is required simply to conduct day-to-day operations. Employees must be paid exactly the amounts owed them, and the government requires that payroll records be maintained for each employee, showing amount earned by them, and paid to them as well as deductions. The sales forces need to know what automobiles are available for sale and the cost or the selling price, or both of each of them. When an automobile is sold, a record must be made of that fact. The person in the stockroom needs to know what parts or accessories are on hand, and if the parts of certain stock becomes depleted, this fact need to be known so that an additional quantity can be ordered. Amounts owed by the company's customer need to be known, and if the customer does not pay his bill on time, this fact need to be known so that proper action can be taken.

The company needs to know the amounts it owes to others and when these amount should be paid. The company needs to know how much money it has in the bank.

Management Accounting

The president, the vice president in charge of automobile sales, the supervisor of the shop and other managers of the Morgan Ford Company do not have the time to examine the details of the operating information. Instead they rely on summaries of this information, they use these summaries, together with other information, to carry out their management responsibilities. The function for which they use this information can be categorized as control, coordination and planning. This accounting information specifically intended for these purpose is called management accounting.

Financial Accounting

Another type of accounting information is intended both for managers and also for the use of parties external to business, including shareholders, bankers and other creditors, government agencies, and the general public.

Definition of Accounting

All of the activity described above are related to accounting. More formally, accounting as been defined as follows:

Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transaction and events, which are, in part at least, of a financial character, and interpreting the results thereof.

One of the important objectives of accounting is (1) to measure the profit of the business and (2) to ascertain the financial position of the business. The first is done through the preparation of profit and loss account.(or income statement) and the second one requires the preparation of balance sheets. All accounting is done and designed to prepare these financial statements periodically, usually once a year. These statements provide a vital information to several groups of affected parties like shareholders, creditors, employees and others like researchers, economist and finally analysts.

Balance Sheet

Objective of Financial Statements

Special purpose financial statements are also prepared to meet the requirement of taxation and other regulatory authorities. In these context we shall discuss the objectives of general purpose financial statements, as the social purpose financial statement are prepared only to meet the need of specific users. Even in the case of general-purpose statements, initially, these were designed to serve the needs of owners rather than creditors or potential investors or the employees. Nowadays, there is a great emphasis on disclosing more and more information in the financial statements. Although accounting bodies and accountants have been voluntary encouraging the trend for disclosing more information through financial statements, recognising the fact that all enterprises may not agree for such a course, Company Law legislation in most of the countries has made it mandatory for enterprises to disclose certain minimum information. The basic objective of financial statements according to AICPA is " to provide quantitive financial information about a business enterprise that is useful to statements users, particularly owners and creditors, in making economic decisions". Apart from providing information useful for economic decisions, the other important objectives are:

To provide information about the economic activities of the enterprise to several external groups who otherwise have no access to such information.

(a) To provide useful information to investors and creditors in taking decisions relating to investment and lending.

(b) To provide information to potential investors in evaluating the earning power of the enterprise.

(c) To provide economic information to the owners to judge the management on its stewardship of the resources of the enterprise and the achievement of the corporate objectives.

(d) To provides information, which enables the investors to compare the performance with other undertakings and take appropriate decision regarding retention or dis-investment