A Comprehensive Guide to Objectives of Accounting

Accounting is the process of recording different financial information and transactions that happen within a business. The accounting process includes a series of events, such as summarising, reporting and analysing financial data to understand an organisation's financial health and position. Financial statements are prepared using the accounting process that provides concise details on the company's finances and operations.

Let us dive deeper into this article to clearly understand the objectives, characteristics and role of accounting in business.

What are the Objectives of Accounting?

Whenever you check your business' finances to understand its financial health or make necessary decisions, an accurate accounting process helps you get a clear picture of the finances. However, without understanding why the accounting process is important in your company, you will not be able to summarise the information necessary to make relevant decisions in the company.

Hence, these are the main objectives related to the accounting process:

• Maintaining Financial Records

One of the most important accounting objectives is recording and maintaining accurate financial records in business. The accounting process records the day-to-day financial transactions of the company, which helps to understand payments, incomes and business finances as a whole.

• Preparing Financial Reports

The transactions recorded with the help of an accounting process assist an accountant in preparing the company's financial reports. The financial report comprises different financial statements such as balance sheets, profit and loss statements and others that record the assets, liabilities, profits and losses of the business. 

• Forecasting Future Expenses, Budgets and Payments

The accounting process helps bookkeepers to predict the future financial aspects of businesses. The data derived from financial statements help plan future expenses, payments and budgets as per business situations. Forecasting future finances also helps accurately plan and distribute funds into different accounts.

• Auditing Financial Reports

The financial report derived from different financial statements of a business helps an accountant to understand the financial position of the business. The financial reports give details on the business's assets, liabilities, expenses and income. Auditing such information can be used to analyse any discrepancies or to understand where the business stands financially.

• Measurement of Financial Performance

Auditing financial reports leads to the measurement of the financial performance of a business. If the information derived from transactions is positive, it shows the business is running smoothly. However, negative details will help stakeholders understand why the business is not performing well and make financial decisions to improve the situation.

• Controlling Fraudulent Activities

A significant objective of accounting is controlling financial fraud. Fraud in business finances can occur due to the inaccuracy of financial recordings. Detailed and thorough accounting processes can help the business understand risky situations and save them from financial thefts and errors.

• Guide on Business Decisions

Stakeholders of an organisation can use the information from accounting results to make crucial business decisions. As accountants or bookkeepers record financial transactions accurately, stakeholders can understand the financial status of the business and use such information to make changes in the company as required.

• Ascertaining Business Profits

Another crucial objective of accounting is that it helps the business to ascertain its profits or losses. Keeping appropriate records of business finances helps to understand the expenses and revenue incurred during a specific financial year. Such information, in turn, helps analyse whether the business is earning profit or going through losses during the accounting period.

• Effective Use of Available Resources

Companies can leverage accounting data to perform valuable internal assessments. Through accounting records, businesses can ascertain which resources were allocated to specific activities and when these allocations occurred. Additionally, these records provide a concise overview of the returns generated from these activities. 

• Understanding Taxes and Filing Them

Fulfilling tax obligations is paramount to safeguarding a company's financial well-being. An important objective in accounting is to carefully track all expenses so that the business can reliably submit the correct amount when it comes time to file and settle taxes. Businesses want to avoid paying too much in taxes, for which they may identify opportunities for potential tax credits while ensuring exact compliance with tax obligations.

Characteristics of Accounting

Now that you have a clear picture of the objectives of the accounting process, you need to know the different characteristics of accounting as well. Here is a list of accounting characteristics you must follow while implementing different accounting procedures.

• Relevancy

A major characteristic of accounting is the relevancy of data and information used in the process. For the financial data to be relevant, it must be accessible whenever required and help in financial forecasting and feedback. It must also aid in customer choices by helping them to predict financial outcomes of different events and confirm any previous ratings.

• Reliability

This characteristic denotes the ability of individuals and businesses to trust. The accounting process provides the stakeholders and bookkeepers with reliable information that is free from errors and correctly represents its objective. Reliability of financial information can be ensured in terms of facts being neutral, credible and unbiased in nature.

• Comparability

Accounting data need to be comparable to understand the financial position of an organisation in the market. The finances have to be error-free and accurate to initiate a comparison with the financial data of competitor businesses to understand whether any major business changes are required.

• Consistency

Consistency of the accounting information and applicable methods ensures uniformity of results every time. This helps a business to keep a transparent and accurate financial trail, even if different individuals get involved during the entire accounting process.

• Assumption of Going Concern

The accounting process acts on the assumption of the going concern principle, that is, an entity will continue its operations for the upcoming period. This characteristic helps to prepare a base for different financial statements and considers the long-term commitments and obligations of the company.

Conclusion

As clear from the above discussion, the accounting process is crucial for businesses to make necessary financial decisions. The accounting objectives show a clear path to accountants or bookkeepers as to what they must do and why they must do it. The analysis of financial data helps stakeholders implement major decisions to improve the business scenario and stabilise company performance for the future.