Nature and Purpose of Accounting

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Nature and Purpose of Accounting

By | November 2007
Page 1 of 11
Financial Accounting

THE NATURE AND PURPOSE OF ACCOUNTING

In the present era most of the business as well as non-business operations are carried out through organizations (mostly by limited liability companies (also known as joint stock companies), societies and charitable organisation), rather than by people working as individuals. Such organization consist of group of people working together for common goal. To accomplish its objectives, the organization uses resources –material, labour and various types of services. It is imperative that such work should be carried out in the most effective and efficient manner since resources are both costly as well as scarce. the people in an organization need information about these resources & about the results achieved through using them. Parties outside the organization need similar information in order to make judgements about the organization. The system that provides this information is called accounting.

Organization can be classified broadly as profit oriented or non-profit. As these names suggest, a dominant purpose of organization in the former category is to earn a profit, while organization in the latter categories have other objectives, such as governing, providing health care, providing education, and so on.

Operating Information

A considerable amount of information is required simply to conduct day-to-day operations. Employees must be paid exactly the amounts owed them, and the government requires that payroll records be maintained for each employee, showing amount earned by them, and paid to them as well as deductions. The sales forces need to know what automobiles are available for sale and the cost or the selling price, or both of each of them. When an automobile is sold, a record must be made of that fact. The person in the stockroom needs to know what parts or accessories are on hand, and if the parts of certain stock becomes depleted, this fact need to be known so that an...

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