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What Is the Purpose of Accounting?

Accounting is often referred to as “Language of Business”. It is a means of communicating financial information to different users for decision making.

The main objectives of accounting are:

RECORDING TRANSACTIONS

The primary role of accounting is to maintain a systematic, accurate and complete record of all financial transactions of a business. These records are the backbone of the accounting system. Business owners should be able to retrieve and review the transactions whenever required.

BUDGETING AND PLANNING

Business owners need to plan how they allocate their limited resources including labor, machinery, equipment and cash towards accomplishing the objectives of the business.

An important component of business management, budgeting and planning enable businesses to plan ahead by anticipating the needs and resources. This helps in the coordination of different segments of an organization.

DECISION MAKING

Accounting assists in a range of decision-making process and help owners in developing policies to increase the efficiency of business processes. Some examples of decisions based on accounting information include the price to be charged for products and services, the resources needed to make these products and services and financing and business opportunities

BUSINESS PERFORMANCE

Using the accounting reports, business owners can determine how well a business is performing. The financial reports are a reliable source of measuring the key performance indicators, so business owners can compare themselves against their past performance as well as against the competitors.

FINANCIAL POSITION

The financial statements generated at the end of the accounting cycle reflect the financial condition of a business at that time. It shows how much capital has been invested, how much funds the business has used, the profit and loss and the number of assets and liabilities of a business.

LIQUIDITY

A common reason for small business failure is the mismanagement of cash. Accounting helps in determining the liquidity of a business which refers to the cash and other liquid resources at your disposal to pay off financial commitments. The information reduces the risk of bankruptcy through detection of bottlenecks.

FINANCING

Accounting helps business owners prepare historic financial records as well as financial projections which can be used while applying for a loan or securing investment for the business.

CONTROL

By placing various checks across the organization, accounting helps in avoiding losses caused by theft, fraud, errors, damage, obsolescence and mismanagement. The internal controls safeguard the business assets and avoid long-term losses.

LEGAL REQUIREMENTS

Law requires businesses to maintain an accurate financial record of their transactions and share the reports with the shareholders, tax authorities and regulators. The financial statements and information are also required for indirect and direct tax filing purposes.

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