In actual practice, if a business is to be run at profit, it has to sell goods at such a price as will enable it to meet out not only expenses on account of cost of goods sold but also other numerous expenses like rent, salary, cartage, freight, commission , electricity, etc. Thus for making a profit, sales must be kept sufficiently high to meet all the other expenses. To emphasize the necessity of accounting, it can be said that accounting must provide the following information and we should ensure that we completely understand and analyze them:
Accounting is defined as the 'the art of recording, classifying and summarizing in terms of money transactions and events of a financial character and interpreting the results thereof .' The American Accounting Association Committee defined accounting as - The process of identifying, measuring and communicating economic information to permit informed judgment and decision by the user of the information.
The Accounting Principles Board of the American Institute of Certified Public Accountants (AICPA) stated "the function of accounting is to provide quantitative information, primarily financial in nature about the economic entities that is intended to be useful in making economic decision."
Business Managers and outside interested parties make use of accounting information for decision making that affect the business. The primary purpose of accounting is to provide information about financial transaction, i.e., transaction involving money of a business enterprise. When a person starts a business or even to maintain the accounts of his daily expenditure he must make use of financial accounts.
The two primary objective of any business are
To earn profit.
To have sufficient funds to pay their debts as and when they are required to be paid.
This information makes a firm or an individual person take the right business related decision which helps to take the business further. Thus, accounting information, if properly and systematically recorded and reported, can direct a business enterprise to run on successful and efficient lines.
Before we move on to understand more about Financial accounting we must clearly understand the advantages-disadvantages and limitations of accounting.