Objectives of Accounting
Accounting provides the basis for management decisions and accountability through the process of recording, summarizing and presenting historical and prospective information.
Key objectives of accounting can be summarized as follows.
The most basic role of accounting is to record and summarize business transactions and balances. This process is often referred to as 'book-keeping' and is fundamental in managing any business.
Business transactions and balances once recorded can be summarized in the form of financial statements. Financial statements provide key information relating to a business such as:
- How much capital has been invested in the business
- How have the funds been utilized in the business
- The amount of profit or loss in a period
- How much the business owes to others (i.e. liabilities)
- The amount of cash, receivables, inventory and other assets
Such information is not only useful for managers (e.g. to keep track of the financial health and profitability of the business) but is also important for other stakeholders as discussed in the article: users of financial statements.
Organizations need to plan how they intend to allocate their limited resources (e.g. cash, labor, materials, machinery and equipment) towards competing needs in the future. An effective way of doing so is by using various forms of budgets.
Budgeting is a major component of managerial accounting. Budgets enable organizations to plan for the future by anticipating business needs and resources. It also helps in coordinating the different business segments of an organization.
A key role of accounting is to provide information and analysis for management decision and control.
Examples of such analysis include:
- Variance Analysis
- Investment Appraisal
- Disinvestment Decisions
- Make or Buy Decisions
- Limiting Factor Analysis
- Ratio Analysis
Accounting provides a basis for analysis of the performance over a period of time which promotes accountability across several tiers of an organization.
Shareholders can ultimately hold the directors responsible for the overall performance of their company through performance appraisal on the basis of accounting information published in the financial statements.