Objectives of Accounting

The entire purpose of accounting is to serve as an information system. It is not an end in itself; it exists to provide useful financial information to people who need it. These people are called the users of accounting information, and they fall into two broad groups: external users (like investors, creditors, government) and internal users (the management of the business itself).

For external users, the information is packaged into standard reports called financial statements. The two main financial statements are the Profit and Loss Account (which shows whether the business earned a profit or incurred a loss over a period) and the Balance Sheet (which shows what the business owns and owes at a specific date). These statements are the primary way a business communicates its financial health to the outside world.

For internal users — the managers who run the business day-to-day — accounting provides much more detailed and frequent information. Managers get reports from the accounting records on a regular basis, such as daily sales figures, weekly expense summaries, or detailed cost breakdowns for a specific product. This helps them make decisions, plan for the future, and control operations.

The textbook lists the following as the primary objectives of accounting:

• To maintain systematic records of financial transactions. This is the most basic function. Every single business transaction — a sale, a purchase, a payment, a receipt — must be recorded in a logical and consistent manner. Without this, no other objective can be achieved.
• To ascertain the results of operations. At the end of a period (usually a year), the business needs to know whether it has made a profit or suffered a loss. This is done by preparing the Profit and Loss Account, which matches all revenues earned against all expenses incurred during that period.
• To ascertain the financial position of the business. Knowing the profit is not enough. The business also needs to know what it owns (its assets) and what it owes (its liabilities). This is shown in the Balance Sheet. The relationship between assets and liabilities reveals the financial strength or weakness of the business. …