IGNOU : M.COM : MCO 5 : UNIT 1 : Q - 1. What are the objectives of Accounting ? Name the different parties interested in accounting information and state why they want it.

Ans. OBJECTIVES OF ACCOUNTING

The basic objectives of accounting is to provide necessary information to the persons interested who will make relevant decisions and form judgement. The persons interested in the business are classified into two types : i) Internal users, and ii) External users. Internal users are those who manage the business. External users are those other than the internal users such as investors, creditors, Government, etc. Information required by the external users are provided through Profit and Loss account and Balance sheet whereas the internal users get required information from the records of the business. Thus the main objectives of accounting are as follows:

1) To keep systematic records of the business : Accounting keeps a systematic record of all financial transactions like purchase and sale of goods, cash receipts and cash payments etc. It is also used for recording all assets and liabilities of the business. In the absence of accounting it is impossible to a human being to keep in memory all business transactions.

2) To ascertain profit or loss of the business : By keeping a proper record of revenues and expenses of business for a particular period, accounting helps in ascertaining the profit or loss of the business through the preparation of profit and loss account. Profit and Loss account helps the interested parties in assessing the profit or loss made by the business during a particular period. It also helps the management to take remedial action in case the business has not proved remunerative or profitable. A proper record of all incomes and expenses helps in preparing a profit and loss account and in ascertaining net operating results of a business during a particular period.

3) To ascertain the financial position of business : The business man is also interested to know the financial position of his business apart from operating results of the business during a particular period. In other words, he wants to know how much he owns and how much owes to others. He would also like to know what happened to his capital, whether it has increased or decreased or remained constant. A systematic record of assets and liabilities facilitates the preparation of a position statement called Balance Sheet which provides necessary information to the above questions. Balance Sheet serves as barometer for ascertaining the financial solvency of the business.

4) To provide accounting information to interested parties : Apart from owners there are various parties who are interested in the accounting information. These are bankers, creditors, tax authorities, prospective investors etc. They need such information to assess the profitability and the financial soundness of the business. The accounting information is communicated to them in the form of an annual report.

 

Parties Interested in Accounting Information

Many people are interested in examining the financial information provided in the financial statements besides a owner or management of the concern. These financial statements help them to know the following :

i) To study the present financial position of business,

ii) To compare its present performance with that of past years, and

iii) To compare its performance with similar enterprises.

 The following are the various parties interested in the financial statements:

i) Owners/Shareholders : Shareholders are the real owners of the company because they contribute the required capital and take the risk of business. Obviously they are interested to know the result of operations and financial position of the company. The shareholders are also interested to use the accounting information to evaluate the performance of the managers because in company type of organisation management of business is vested in the hands of paid managers.

ii) Prospective Investors : The persons who are interested in buying shares of a company or who want to advance money to the company, would like to know how safe and rewarding the investments already made or proposed investments would be.

iii) Lenders : Initially the required funds of the business are provided by the owners. When business is going on, it requires more funds. These funds are usually provided by banks and other money lenders. Before lending money they would like to know about the solvency of the enterprise so as to satisfy themselves that their money will be safe and repayments will be made on time.

iv) Creditors : The creditors are those who supply goods and services on credit. These creditors like other money lenders are also interested to know the credit worthiness of the business. The accounting information greatly helps them in assessing the ability of the enterprise to what extent credit can be granted.

 v) Managers : Accounting information is very much useful to managers. It helps them to plan, control and evaluate all business activities. They also need such information for making various decisions relating to the business.

vi) Government : The Government may be interested in accounting information of a business on account of taxation, labour and corporate laws. The financial statements are of great importance for assessing the tax liability of the enterprise.

vii) Employees : The employees of the enterprise are also interested in knowing the state of affairs of the organisation in which they are working, so as to know how safe their interests are in the organisation. The knowledge of accounting information helps them in conducting negotiations with the management.

viii) Researchers : The accounting information is of immense value to the researchers undertaking research in accounting theory and practices.

ix) Citizen : An ordinary citizen as a voter and tax payer may be interested to know the accounting information to measure the performance of Government Company or a public utility concern like banks, gas, transport, electricity companies etc.