Purpose of Accounting
The main purpose of accounting is
- To keep a systematic record of business transactions
- To calculate Profit and Loss
- To ascertain the financial position of the business
- To provide financial information to different users of this information.
Who are users of accounting information?
These stakeholders or users might include
- Owner/Shareholders: How much profit?
- Managers: How business performed and how they can improve the performance in future
- Employees: To know the profits so that they could demand better wages?
- Investors: Is it safe and profitable to invest in the business?
- Suppliers: Will the business be able to pay for their supplies?
- Government: How much tax should be collected?
- Lenders: It is safe to lend money to the business?
Types of Accounting
Financial Accounting: It is about recording business transactions in a systematic manner, to ascertain the profits or losses of the business by preparing Profit and Loss Account and Balance Sheet.
Cost Accounting: It involves finding out the total cost and unit cost of goods and services produced by the business.
Management accounting: Accounting table and formats may not make sense to a person other than an accounting. This is where Management accounting comes in. It is presenting the accounting information in a manner which a layman manager could understand. It involves ratio analysis, budgets, cash flows etc.
We will be covering some parts of Management accounting in Analysis of Final Accounts section.
