Purpose of Accounting
The main Purpose of accounting is to provide fair information on the financial statement of the company to third parties such as shareholders, credit agencies, business partners, etc.
The 3 main purpose of accounting are discuss below;
The Internal Purpose of Accounting
In the business world, many financial flows circulate between different companies. The company must be able to know the different flows that come in and out to determine if it has won or lost money. In order to measure this gain or loss, the unit of reference is an entire year, this is called in accounting the fiscal year. This exercise may coincide with the calendar year (1 January to 31 December) or be freely determined by the company, for example from 1 June to 31 May
You may also like to Read:
- What is Accounting | Origins | Categories | Objectives
- Basic Functions of Accounting
- 60+ Basic Accounting Terms Dictionary
Accounts are also tracked to track accounts receivable and accounts payable to ensure that the various receivables have been cashed and the debts have been repaid.
It can also be used to analyze the distribution of sales and expenditures in order to know the various adjustments that can be made to improve the following exercises.
The External Purpose of Accounting
Many exchanges between companies are paid for with payment periods, that is, one company buys goods or services from another company and pays the amount owed to it by the company. This trade represents a risk for companies, because when a payment period is granted, the company can not be certain that it will be refunded. It is enough that the client company goes bankrupt so that it becomes very complicated to be reimbursed. This is the whole issue of accounting in a company’s relationship with its third parties. Before granting a large payment period, it is necessary to ensure that the client company is strong enough to repay its debts.
The same purpose applies to banking organizations that must know the exact situation of the company to quantify the risk and thus determine the rate of credit that they will grant the company. The higher the risk, the higher the credit rate. It is said that the rate pays the risk taken by the bank. The bank may also refuse to lend if it finds that the risk is too high.
The accounting will also serve the various investors in order to know the company’s situation its growth and future prospects. The same accounting can be presented in many different ways that is why it is important to know what image one wants to communicate with the different people who will be led to analyze it. Accounting is the financial image of the company in a capitalist business world, so it is paramount to look after this image.
Since it is important for the various partners to know the financial situation of the company, it is therefore public and accessible freely to all persons by making the application to the registry of the commercial court. There are also specialized sites on which one can recover accounting data such as company.com or infogreffe.fr.
The fiscal Purpose of Accounting
Accounting is also used to communicate with the State which is responsible for levying taxes on the company on the basis of the profit it realizes during the financial year. Certain tax rules are different from the accounting rules. Measures allow tax advantages to be obtained by applying different rules.