Accounting is an information system which receives data,
processes the same and gives its output in the form of information which is
useful for decision making. It is the art as well as the science of recording,
classifying, summarizing and analyzing business transactions which are of
financial character and are expressed in terms of money.
According to American Institute of Certified Public Accountants (AICPA) “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are at least of financial character and interpreting the results thereof”
Objectives of accounting
1. Maintenance
of records of business
The main purpose of accounting is to
identify business transactions of financial nature and enter them into
appropriate books of accounts. For the purpose, business transactions are
classified into assets, liabilities, revenues and expenses.
2. Calculation
of Financial Position
Profit earning is main purpose for which
a business is carried on. This information is available from the account
prepared with the specific purpose of ascertaining the amount of profit or
loss. The account prepared is known as ‘Profit and Loss Account’
3. Depiction
of Financial Position
At the end of an accounting period, a
position statement known as the Balance Sheet is prepared. The value of assets
and liabilities are depicted in the Balance Sheet. The Balance Sheet gives a
true and fair view of the state of affairs of the concern.
4. Making
information available to various users
The result obtained from accounting
records may be communicated to the interested parties like owners, investors,
creditors, bankers, government, employees etc... Accounting makes information
available to all those interested parties.
5. Elimination
of error and frauds
On recording the transactions by
following the double entry system, errors and misappropriation of funds can be
reduced and even eliminated.
Advantages and Disadvantages of Accounting
Advantages of Accounting
- Maintenance of business records
- Preparation of financial statements
- Comparison of results
- Decision making
- Evidence in legal matters
- Provides information to related parties
- Helps in taxation matters
- Valuation of business
- Replacement of memory
Disadvantages of Accounting
- Expresses Accounting information in terms of money
- Accounting information is based on estimates
- Accounting information may be biased
- Recording of Fixed assets at the original cost
- Manipulation of Accounts
- Money as a measurement unit changes in value
