Purpose, characteristics and advantages of accounting
Purpose of accounting
- The primary purpose of accounting is to provide information which is useful for decision making.
- It provides reliable information about the sources & trends of revenues of an enterprise.
- It provides authenticate information about the economic resources & obligations of a business.
- It provides reliable information about the changes in financial and investment activities of a business.
- It also gives reliable information to outsiders in forms of various disclosures to assess the credibility of the business.
Characteristics of accounting
Accounting of the modem era has the following characteristics:
- As accounting deals with uncertainty and complexity so the need for professional judgment & estimates is imperative.
- Accounting statements can be prepared on
(a) Cash basis which recognizes an event as a transaction only if cash is received or paid.
(b) Accrual basis which recognizes revenues earned and expenses incurred as transactions occur.
- Accounting is by nature historical which means the recording of past happenings.
Advantages of accounting
- It gives valuable information for making managerial decisions.
- It provides helpful information to investors for estimating the risk, gains and opportunities of business.
- It provides critical information to creditors who are worried about their claims on the business.
- It provides useful information about management’s ability to achieve maximum benefit from limited resources.
- It also serves in providing such information to business which can be helpful for increasing its earning capacity.