Basics of Financial Accounting

Objectivesof Accounting

The basic objectives of accounting are to provide financial information to the managers, owners and the stakeholders i.e. the parties who are interested in an organisation. To attain such objectives various financial statements are prepared.

The users of financial statements may be broadly classified in the following groups –

(a)       The investor – This group includes both existing and potential owners of shares in companies. They are broadly interested in the performance of the entity and the dividend declared by such entity. They also measure the social and economic policies of the company to decide whether they will remain associated with such entity.

(b)       The lender – This group includes both secured and unsecured lenders. Such creditors may be financing long term or short term loans. The financial statements are analysed to determine an organisation’s ability as to

(i)       pay the interest on due date,

(ii)       the growth and stability of the organisation,

(iii)      capability of repaying the loan as agreed upon, and.

(iv)       the book value of assets offered as security by the organisation.

(c)       The customers and suppliers – While customers are interested in the ability of the organisation to provide goods/services, the suppliers are interested in the capability of the organisation to pay their dues as and when due.

(d)       The government – This group includes various taxation authorities viz. Income tax, Excise department, Sales tax department etc. and also various other government authorities for statistical purposes and for framing various economic and planning policies.

(e)       The employee group – The employees are concerned with the capability of an organisation to pay their present emoluments and future retirement benefits. Moreover, financial statements help them to asses job security.

(f)       The analyst – Advisors to the management, investors, employees or public at large collect various data from financial statements to advise their clients.

(g)       The Management – Financial statements provide required information to different levels of management to assist them in making decisions at each appropriate level.