The Purpose Of Accounting

By Author: Randika Abeysingha
Total Articles: 1
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The transactions are recorded in books of prime entry
The transactions are than analyzed and posted to the ledger
Finally the transactions are summarized in the financial statements

The need of Accounts

If business runs efficiently, why it have to go through all the bother of accounting procedures in order to produce financial information?

A business should produce information about its activities because there are various groups of people who want or need to know that information. This sounds rather vague, to make it clearer, we should look more closely at the classes of people who might need information about a business. We need also to think about what information in particular is of interest to the members of each class.

Users if financial statements and accounting information
The people who might be interested in financial information about a large public company may be classified as follows,

Managers of the company.
Shareholders of company.
Trade contacts.
Providers of finance to the company.
The Inland Revenue.
Employees of the company.
...
... Financial analysts and advisers.
Government and their agencies.
The public.

Accounting information is organized into financial statements to satisfy the information needs of these different groups,

Non commercial undertakings

It is not only businesses that need to prepare accounts, Charities and Clubs also prepare financial statements every year. Accounts also need to be prepared for public sector organization.

The Main Financial Statements

Transactions are summarized in the financial statements. The two main financial statements are the Balance sheet and the Profit and loss account. Both of the balance sheet and the profit and loss account are summaries of accumulated data.

The balance sheet - is simply a list of all the assets owned and all the liabilities owned by a business as at a particular date. It shows the financial position of the business at a particular moment.

A profit and loss account - is a record of income generated and expenditure incurred over a given period.

The period chosen will depend on the purpose for which the statement is produced, that time called finance year.

Management or cost accounting is a management information system which analysis data to provide information as a basis for managerial action. The concern of a management accountant is to present accounting information in the form most helpful to management.

Financial Accounting

Financial accounting is mainly a method of reporting the results and financial position of a business. It is not primarily concerned with providing information towards the more efficient conduct of a business.

This is particularly clear in the context of the published accounts of limited companies. Accounting standards and public law prescribe that a company should produce accounts to be presented to the shareholders.

Financial Management

The financial manager is responsible for raising finance and controlling financial resources. Including the following decisions

(a)Should the firm borrow from a bank or raise funds by issuing shares?
(b)How much should be paid as a dividend?
(c)Should the firm spend money on new machinery?
(d)How much credit should be given to customers?
(e)How much discount should be given to customers who pay early?

Auditing

The annual accounts of a company must generally be audited by a person independent of a company. In practice, this often means that the members of the company appoint a firm of registered auditors to investigate the financial statements and report as to whether or not they show a true and fair view of the company's results for the year and its financial position at the end of the year.

Qualities of Good Accounting Information

Below are some features that accounting information should have if it is to be useful,

Relevance
Comprehensibility
Reliability
Completeness
Objectivity
Timeliness
Comparability

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