The Purpose of accounting

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What is the Purpose of accounting?

The Purpose of accounting- The basic purpose of accounting is to provide true, fair and useful information to the interested group of users, both external and internal the organisation. There are number of users interested in knowing about the financial soundness and the profitability of the business.

The Purpose of accounting

The main purposes of accounting are-

1.To Maintain  a systematic Records of Business Transactions-  The main purpose of accounting is to identify the all financial transactions and events of the business and to record them into proper books(Journal and Subsidiary Books) of accounts in a systematic manner.

2. To ascertain Profit or Loss: The next main purpose of accounting is to determine the financial performance, i.e. profit earned or loss suffered by the business during a particular period. For this purpose, Trading and Profit and Loss Account or Statement of profit and loss is prepared at the end of the accounting period/end of the financial year.

3. To Determine Financial Position- Accounting also aims at ascertaining the financial position of the business concern in the form of its assets, liabilities and capital at the end of every accounting period. For this purpose Balance sheet is prepared at the end of the accounting period/end of the financial year.

4. Providing Accounting Information to its Users-The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs and charts to the users (external and internal) who  analyse them as per their need .

5.Facilitating Management- Another objective of accounting is to provide financial information to the management. Management requires it for decision making and for exercising effective control,budgeting and forecasting.

6. Fulfilling Legal Obligations- Accounting information helps in fulfilling legal obligations e.g. GST, income tax etc.

Accounting ?

Accounting is the systematic process of identifying, recording, classifying, summarizing, interpreting and communicating financial information to the users for judgment and decision-making.

Book-keeping does not present a clear financial picture of the state of affairs of a business. Book keeping is the recording phase while accounting is concerned with the summarizing phase of an accounting system.

“Accounting is also called the language of business”

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Also read : Fixed and Working capital

Also read : Golden Rules Of Accounting