Introduction to Accounting- Meaning & Objectives

Have you ever thought of how large companies like Reliance or Tata interpret their financial position at the end of the year? Do the employees have special power to check the profits or losses of the business?

The answer is big: NO

Definition of Accounts:

Accounts is a process of reporting, recording, interpreting, summarizing, analyzing the economic and financial data of the business or a company. 

Accounting helps the managers or the owners of the company to know the financial status or position of the business. Now-a-days, Accounting is useful for every business and beneficial to all. Many aspects of our lives are dependent on accounts like, personal financial planning, investments, income tax law etc. We have different roles to perform in life- the role of a student,of a family head, of a manager, of an investor etc. The knowledge of accounting is an added advantage to perform these roles. However, we shall limit our scope of discussion to a business organisation and various financial aspects of such an organisation.

Aspects of Accounting:

• Economic Events:  Every business organisation has to go through number of economic events like purchasing the products or selling the products along with transportation or advertising costs, employee salary and other miscellaneous expenses.

• Identification, Measurement, Recording and Communication: The accounting information should be outlined in such a way that right information is identified, measured, recorded and communicated to the right individual at the right time.

• Organization: It refers to the size of the business along with the number of employees and level of business operation.

• Interested users of Information: Customers are the most interested users of information about the business or the companies financial position because accordingly they will take the decision regarding investment in the business or the company.

Objectives of Accounting:

• To maintain a systematic record of business transactions: A normal business conducts various transaction daily. Any human being cannot remember each and every transaction that has taken place in day to day business. Accounting is a process where each and every transaction related to business is recorded first in Journal and posted to ledger followed by preparation of trial balance and then preparing the financial statements.

• To ascertain profits and losses of the business: Any person or any company carrying a business is interested to know the position of the business at the end of the year. Every business has the objective to maximize the profits. Whether the business earned profits or loss is ascertained by preparing profits and loss account or Income statement. A comparison of Income & Expenditure gives either Profits or Losses.

• To depict financial position of the business: A businessman is also interested in ascertaining his financial position at the end of a given period. For this purpose, a position statement called Balance Sheet is prepared in which assets and liabilities are shown. 

• To provide accounting information to the interested users: Apart from owner of the business, there are some other parties like bankers, creditors, tax authorities, investors, researchers etc. who are interested in getting the accounting information of the business. Hence, one of the objectives is to make the accounting information available to the interested users to enable them to take sound and effective decisions. The accounting information is available in the form of "Annual Report".

Accounting is also called as the Financial Language of  the Business.