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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.

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