Accounting can be defined as a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. Let us see more about the meaning and roles of accounting in business.
Characteristics of Accounting
The characteristics of accounting can be broadly classified into the following categories-
- Primary characteristics
- Secondary characteristics
Learn the Basics terms of Accounting here.
Primary Characteristics of Accounting
The following are the primary characteristics of accounting as follows-
- Relevance: Relevance in accounting is closely related to the concept of useful information. It means that the information must be capable of making a difference in taking various decisions by the users. The information gathered by users relevant for one purpose may not be necessarily relevant for other purposes. The relevant information also reduces decision-makers uncertainty about future acts.
- Reliability: Reliable information is required to form judgments about the earning potential and financial position of a business firm. Reliability differs from item to item. There are many factors affecting the reliability of information such as uncertainties inherent in the subject-matter and accounting measurements.
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Secondary Characteristics of Accounting-
The following are the secondary characteristics of accounting as follows-
- Comparability: Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other periods, known as an intra-firm comparison or with the accounting information of the other enterprises, known as an inter-firm comparison.
- Understandability: Understandability means that the information provided through the financial statements must be presented in a manner that the users are able to understand it.
Objective of Accounting
The following are the main objectives of accounting:-
To keep Systematic Records
The main objective of accounting is to keep a systematic record of financial transactions which helps the users to understand the day to day transactions in a systematic manner so as to gain knowledge about overall business.
To Protect Business Properties
Accounting provides protection to business properties from unjustified and unwarranted use. Information about the above matters helps the proprietor in assuring that the funds of the business are not necessarily kept idle or underutilized.
Another objective of accounting is that it helps in ascertaining the net profit earned or loss suffered on account of carrying the business which is done by keeping a proper record of all books of accounts with respect to revenues and expenses of a particular period.
Ascertain the Financial Position
The accounting also helps the businessman to know about his financial position. This objective is served by the Balance Sheet or Position Statement. The Balance Sheet is a statement of assets and liabilities of the business on a particular date. It serves as a tool for ascertaining the financial health of the business.
Facilitate Decision Making
Accounting also helps in the collection, analysis, and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision-making.
Another objective of accounting is that it can be defined as accounting functions as an information system for collecting and communicating economic information about the business enterprise. This information helps the management in taking appropriate decisions.
Roles of Accounting
Accounting plays an important and useful role in developing the information for various types of users. The major roles of accounting in different areas are as follows-
- Since the increased volume of business results in a large number of transactions and no businessman can remember everything. Therefore accounting records reduce the necessity of remembering various transactions.
- Another role of accounting records is that it should be prepared on the basis of uniform practices will enable a business to compare results of one period with another period.
- The various different authorities have their opinion according to which, they believe that the facts contained in the set of accounting books are maintained according to generally accepted accounting principles which will help in better understanding for users of financial information.
- Those accounting records which are supported by proper and authenticated vouchers are good evidence in a court of law.
- Another concerned role is that if a business is to be sold as a going concern, then the various values of different assets which are shown by the balance sheet will help in bargaining proper price for the business.
Q: True & Fair profit or loss of a company is known by:
- Preparing Trial Balance
- After preparing Vouchers
- Preparing Trading and Profit and Loss A/c
- None of the above
Ans: The correct option is C. We can only ascertain the profit or loss of the company after arriving at the Net Profit which is obtained in the Profit and Loss A/c. The Trading A/c gives us the operating profit. Arriving at the profit figure is one of the most important roles of accounting.