Purpose, characteristics and advantages of accounting

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Purpose of accounting

  1. The primary purpose of accounting is to provide information which is useful for decision making.
  2. It provides reliable information about the sources & trends of revenues of an enterprise.
  3. It provides authenticate information about the economic resources & obligations of a business.
  4. It provides reliable information about the changes in financial and investment activities of a business.
  5. 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:

  1. As accounting deals with uncertainty and complexity so the need for professional judgment & estimates is imperative.
  2. 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.
  3. Accounting is by nature historical which means the recording of past happenings.

Advantages of accounting

  1. It gives valuable information for making managerial decisions.
  2. It provides helpful information to investors for estimating the risk, gains and opportunities of business.
  3. It provides critical information to creditors who are worried about their claims on the business.
  4. It provides useful information about management’s ability to achieve maximum benefit from limited resources.
  5. It also serves in providing such information to business which can be helpful for increasing its earning capacity.
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