Purposes of Accounting

Purposes of Accounting

In this article some important purposes of accounting have been briefly explained. One of the most important purposes of accounting is provision of information to different stakeholders for economic decision making. In modern business world Accounting is a fundamental requirement of every business. The accounting importance is not only limited to commercial organizations, and this is equally important for non profit organizations.

Important Purposes of Accounting

Some important purposes of Accounting includes tracking of receivables & payable, calculation of accurate profit, controlling & planning the business, tracking of financial transactions etc. These important purposes of accounting have been discussed in details;

1.   Tracking of Receivables & Payable:

Tracking of receivables and payable is one of the important purposes of accounting. Organization requires tracking of payable accounts for timely payment, similarly tracking of receivables is required for timely collection from the customers. Thus accounting play vital role in working capital management of the organization.

2.   Accurate  Calculation of Profit:

Another important purpose or aspect of accounting is calculation of accurate profit for business. We know that Profit maximization is one of the primary objectives of every business and owner is very keen to know the accurate profit of the business interested and this primary information is accurately calculated with the help of accounting. Thus accounting fulfills one of the basic information need of owner.

3.   Controlling & Planning the Business:

Accounting also acts as a basic controlling & planning tool for the business. Accounting information helps management to identify different control weakness within organization and management on the bases of such information takes appropriate corrective actions . Accounting information may be used for future planning like setting different targets for sales team etc.

4.   Tracking of Financial Transactions:

Another important purpose of Accounting is tracking of financial transactions. In business we need the historical record/transactions for many reasons like audit, payment to creditors, collection from receivables, analyses, fraud investigation etc. Accounting facilitates speedy tracking of financial transactions with the help of transaction/voucher number.

5.   Identification of Mistakes & Fraud

Fraud identification is another important aspect or purpose of Accounting. Management can investigate fluctuations in the financial results for possible frauds or mistakes. Different types of ratios are used for such analyses like gross profit ratio, net profit ratio. vertical and horizontal analyses techniques may also be used for indication of any possible fraud or error.

6.   Performance Appraisal Tool:

Another important purpose for Accounting is performance appraisal or performance evaluation of different managers. This objective is achieved through responsibility accounting. The concept of Responsibility accounting has been explained in my other article.

7.   Future Planning:

Accounting can also be used as tool for future planning of the business. Accounting information can be used to set the future targets for employees and department. These target may include sales targets, cost control target etc.

List of purposes of Accounting

List of purposes of Accounting are as under

1.   Accounting facilitates tracking of the account payable & Receivables.

2.   Accounting also facilitates timely payment & collection.

3.   Accounting helps improves working capital management.

4.   Accounting calculates accurate profit of business.

5.   Accounting helps in planning & controlling the business.

6.   Accounting can be used as controlling tool.

In this article we have briefly explained some important purposes of accounting.