Purpose of Accounting

Purpose of Accounting

In this article the need & purpose of accounting has been explained. Accounting is recording and reporting of financial transactions. Accounting is a fundamental requirement of every modern business. It is important to note that accounting is not only limited to business world and equally important for nonprofit and public organizations.

Main Purposes of Accounting

Some important purposes of Accounting include tracking of receivable &payable, accurate profit calculation, controlling the business, tracking of financial transactions etc. These purposes have been briefly explained below;

1.   Tracking of Receivable & Payable:

First important purpose for accounting is tracking of receivables and payable. It is technically not possible to track the account receivable and account payable without proper books of account. This tracking facilitates timely payment to the creditor and timely receipt from the customer. Thus accounting play important role in working capital management.

2.   Accurate Profit Calculation:

Another important purpose of accounting is calculation of accurate profit for business. We know profit maximization is an important aspect of the business. Therefore businessman is really interested in the accurate profit earned by the business.

3.   Controlling the Business:

Accounting serves as a basic controlling tool for a business and a business without proper accounting system is exposed to frauds & errors. Many businesses cease to exist due to poor accounting system.

4.   Tracking of Financial Transactions:

Accounting facilitates the tracking of financial transactions.  Tracking of financial transaction is required for many reasons like audit, payment to creditor, etc. Accounting or accounting record facilitates speedy tracking of financial transactions.

5.   Identification of Mistakes & Fraud:

Accounting also helps in identifying the frauds & errors in the business. Interpretation & analyses of financial results may indicate the possibilities of errors or frauds. Management investigates the fluctuation in result for possibility of fraud and mistakes.

6.   Performance Appraisal:

Another important purpose for Accounting is evaluation of performance of different manager or regions. This is done through responsibility accounting. Responsibility accounting has been explained in my other article.

7.   Future Planning:

Accounting also play important role for future planning of business. for example current revenue figure provides important bases for future sales planning & target setting.

List of purposes of Accounting

List of purposes of Accounting are as under

1.   Accounting tracks the account payable & Receivables.

2.   Accounting facilitates timely payment to creditor.

3.   Accounting helps improves working capital management.

4.   Accounting calculates accurate profit of business.

5.   Accounting Facilitates in planning of business.

6.   Accounting serves as important controlling tool for business.