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1.6 Theoretical Framework Principles and Practices of Accounting Paper 1
1.4 Objectives of Accounting
Systematic recording of Transaction: It is the basic objective of accounting, i.e.
book keeping. These recorded transactions are then classified and summarised for
preparation of financial statements and for analysis and interpretation.
Ascertainment of Results: Preparation of profit and loss account helps the organisa-
tions, i.e. management and key stakeholders to know the financial results for a partic-
ular period and help them take rational decision.
When a business is said to be in profit/loss is as follows:
Revenue exceeds expenditure = Profit
Expenditure exceeds revenue = Loss
Ascertainment of Financial Position: Apart from the results of the business, the
stakeholders are interested to know what the entity owes, i.e. liability to the out-
siders and what he owns, i.e. asset on a certain date. This is reflected in the balance
sheet. Balance sheet is nothing but the statement of assets and liabilities of the
entity at a particular point of time.
Providing Information to the Users: As we know that accounting is “Language of Busi-
ness” that communicates the financial results and financial position of an enterprise
by means of financial statements. Hence, accounting meets the information needs of
the users and helps them take rational decision.
To Know Solvency Position: Preparation of balance sheet discloses the assets and
liabilities of the enterprise on a certain date and also discloses its ability to meet its
short-term liabilities (liquid position) and long-term liabilities (solvency position) as
and when it falls due.
We can remember the objectives of accounting by the word – “FIRST” as shown in Fig. 1.3.
Financial Position
Information to Users
“FIRST” Results of Business Entity
Solvency Position
Recording of Transaction
Fig. 1.3 Objectives of Accounting
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