Objectives of Accounting

The main objectives of accounting are to systematically record business transactions, determine profit or loss, present the financial position of the business, and provide useful information to different users for decision-making.

Accounting helps a business owner understand how the business is performing financially and whether the business is growing or facing problems.

(1) Maintenance of Systematic Record of Business Transactions

The first and most important objective of accounting is to maintain a complete and systematic record of all business transactions.

Every financial transaction is recorded according to proper accounting rules. This helps prevent errors, omissions and fraud.

Normally, transactions are first recorded in the Journal or Subsidiary Books and then transferred to the Ledger.

Real Life Example

Suppose a shopkeeper buys goods worth ₹10,000 and sells goods worth ₹15,000.
If he records these transactions properly in accounting books, he can easily track his purchases, sales and remaining stock. Without records, it would become difficult to manage the business.

(2) Calculation of Profit or Loss

Another important objective of accounting is to determine whether the business has earned profit or suffered loss during a particular period.

For this purpose, financial statements like Trading Account and Profit & Loss Account are prepared at the end of the accounting period.

These statements help the businessman understand:

How much goods were purchased during the period.
How much goods were sold during the period.
How much goods remain unsold and what their value is.
How much money was spent on expenses.
How much income was earned.

If revenue is greater than expenses, the business earns profit.
If expenses are greater than revenue, the business suffers a loss.

Real Life Example

Suppose a business earns ₹2,00,000 from sales and spends ₹1,50,000 on expenses.

Profit = ₹50,000

Accounting helps the owner clearly understand this result.

(3) To Know the Exact Reasons for Net Profit or Net Loss

Accounting also helps a businessman understand why profit or loss occurred.

By analyzing the accounting records, the owner can identify:

Which expenses are increasing
Which products are selling more
Where the business is losing money

This helps in better planning and decision-making.

Real Life Example

If profits are decreasing, accounting records may show that rent expenses or employee salaries have increased, which is reducing profit.

(4) Depiction of Financial Position of the Business

Only knowing profit or loss is not enough. A businessman must also know the financial position of the business.

For this purpose, a statement called the Balance Sheet is prepared.

The Balance Sheet shows:

Assets (things owned by the business)
Liabilities (amounts payable to outsiders)
Capital (owner’s investment)

By looking at the Balance Sheet, one can quickly understand:

How much money the business will receive from debtors.
How much the business has to pay to creditors.
How much cash is available in hand or in the bank.
What assets like stock, land, machinery etc. the business owns.

Real Life Example

If a business has assets worth ₹10,00,000 and liabilities of ₹4,00,000, the owner can clearly see the financial strength of the business.

(5) To Portray the Liquidity Position

Another objective of accounting is to show the liquidity position of the business.

Liquidity means the ability of the business to pay its short-term obligations and manage cash flow.

For this purpose, accounting prepares a Cash Flow Statement, which shows:

Cash received (inflows)
Cash paid (outflows)

These cash movements are classified into:

Operating activities
Investing activities
Financing activities

Real Life Example

If a business has very little cash but large expenses, accounting records will show the cash shortage, helping the owner take corrective action.

(6) To File Tax Returns

Accounting also helps businesses prepare and file tax returns.

Proper accounting records are necessary for calculating taxes such as:

Income Tax
Goods and Services Tax (GST)

Without accounting records, it would be very difficult to calculate the correct amount of tax payable.

Real Life Example

A company uses its accounting records to calculate total income and expenses, which are then used to determine the tax payable to the government.

(7) Communicating Accounting Information to Various Users

Another important objective of accounting is to communicate financial information to various interested parties.

These users may include:

Business owners
Investors
Creditors
Banks
Employees
Government authorities

Accounting reports help them make informed decisions about the business.

Real Life Example

Before giving a loan, a bank studies the financial statements of the company to see whether the company is financially stable.

✅ In Simple Words

The objectives of accounting are to:

Maintain proper records of transactions
Calculate profit or loss
Understand reasons for profit or loss
Show the financial position of the business
Present cash position
Help in tax filing
Communicate financial information to users

Objectives of Accounting