What are the Objectives of Accounting and Its Need?

The main objectives of accounting include recording, summarizing and analysing financial documents. Based on these objectives, businesses maintain and regulate their finances. Accounting is a branch of finance that involves the process through which financial transactions are classified, recorded as well as summarized. 

Table of Contents

• Objectives of Accounting
• Recording Financial Transactions
• Summarizing Financial Information
• Determining Financial Position
• Assessing Operational Efficiency
• Planning and Budgeting
  
• Why Do We Need Accounting?
• Phases of Accounting

Objectives of Accounting

The following are the objectives of accounting:

1. Recording Financial Transactions

One of the main objectives of accounting is maintaining systematic and chronological records of financial transactions. Accounting ensures that financial information is properly documented in a way that businesses can assess it to improve their financial health.

Several financial statements are used for recording different types of financial information. This includes income statements, balance sheets, profit and loss statements and cash flow statements. 

Financial transactions are recorded in chronological order. This helps in getting a proper timeline of financial activities. In accounting, a double-entry system is followed according to which every transaction is recorded in a minimum of two accounts. One is debit and the other is credit. This is done to ensure that the accounting equation is balanced.

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2. Summarizing Financial Information

Another objective of summarizing financial information involves the creation of financial statements. By summarizing financial information, one can learn about the financial situation at a glance. Through the balance sheet, one learns about the assets, liabilities as well as equity at a particular time. 

Through the income statement as well as profit and loss statement, the company shows revenue, expenses and profits over a period. Overall, this helps in understanding the financial information of the company.

3. Determining Financial Position

Another objective of accounting is determining the financial position of the organization. This involves the evaluation of the balance of equity, assets and liabilities. Any company's financial position is reflected in its balance sheet which reflects assets on one side and liabilities on the other side. 

Once the financial position of the company is determined, it is not only considered by stakeholders but also by investors. This helps them decide whether they want to invest in the company or not.

4. Assessing Operational Efficiency

Another objective of accounting is to evaluate the operational efficiency of a business. This includes measuring inventory turnover rates, the efficiency of the accounts receivable process, and the effectiveness of money collection by the company. Another important aspect of operational efficiency is related to cost management. It involves analysis of all costs that are associated with business operations. This involves direct costs such as materials and labour costs. 

It also involves indirect costs such as overhead costs. With a detailed cost analysis, companies can identify areas of expenses where reduction is possible without compromising the quality or output.

5. Planning and Budgeting

Planning and budgeting is one of the objectives of accounting. The aim is to map out the financial direction and effectively allocate resources for achieving the short-term and long-term goals of the organization. This ensures that the organization can meet its objective and accordingly respond to challenges that may arise. 

For strategic planning, financial conditions and trends are forecasted, market opportunities are analysed and financial targets are set. Once financial planning is done, the organization can plan their operations in the desired direction.

Why Do We Need Accounting?

Accounting is required for the following reasons:

• Financial Record Keeping: Accounting ensures accurate recording of all financial transactions. It provides a detailed financial history of the business.
• Decision Making: It supplies critical financial information and analyses. This aids in making informed decisions regarding operations, investments, and strategy.
• Regulatory Compliance: Accounting helps businesses comply with legal and financial reporting requirements. This avoids penalties and maintains a positive reputation.
• Performance Evaluation and Strategic Planning: Accounting enables the evaluation of business performance through detailed financial analysis. It supports strategic planning for future growth.
• Transparency and Stakeholder Trust: Accounting provides clear and accurate financial reports. This fosters transparency, building trust among investors, creditors, and other stakeholders.

Phases of Accounting Cycle

The following steps complete the accounting cycle:

1. Identifying Transactions: The cycle begins with identifying economic events that affect the financial position of the organization. These transactions can include sales, purchases, payments, and receipts. Only transactions that are measurable in monetary terms are considered.
2. Recording Transactions: Once identified, transactions are recorded in chronological order in the journal as journal entries. This step involves specifying the accounts affected and the direction of the effect (debit or credit). The recording is done according to the double-entry bookkeeping system, ensuring each transaction affects two accounts to keep the accounting equation balanced.
3. Posting Transactions: The next phase involves transferring the entries recorded in the journal to the respective accounts in the ledger. This process, known as posting, organizes transactions by account, making it easier to see the cumulative effect of transactions on each account over a period.
4. Calculation of Trial Balance: After posting transactions to the ledger, a trial balance is prepared for testing the equality of debits and credits. The trial balance lists all the ledger accounts and their balances at a specific point in time. If the total debits equal the total credits, the books are considered to be in balance.
5. Worksheet Analysis: This phase involves creating a worksheet that is used for preparing financial statements. The worksheet is an internal document that summarizes all the ledger accounts and their balances and is used for making adjustments and closing entries.
6. Adjustments to Journal Entries: The adjusting entries are made to update the accounts before the financial statements are prepared. These adjustments are necessary for accrual accounting and may include entries for accrued revenues, accrued expenses, depreciation, and prepayments. Adjustments ensure that the financial statements reflect the true financial position and performance of the organization.
7. Generating Financial Statements: Once all adjustments are made, the financial statements are prepared. These include the income statement, which shows the organization's profitability over a period; the balance sheet, which presents the financial position at a specific date; and the cash flow statement, which outlines the cash inflows and outflows.
8. Closing Financial Statements: After the financial statements are generated, closing entries are made to clear out balances in temporary accounts (revenues, expenses, and dividends) and transfer their balances to permanent accounts (retained earnings). This resets the temporary accounts for the next accounting period.
9. Post-Closing the Trial Balance: The final phase involves preparing a post-closing trial balance to ensure that temporary accounts have been closed and the ledger is balanced. This trial balance includes only the balances of permanent accounts and is used as the starting point for the next accounting cycle.