1.3. Nature and purpose of accounting is established.

Nature and Purpose of Accounting

1. Nature of Accounting

The nature of accounting refers to what accounting is and how it works. Accounting is:

a) A systematic process

Accounting involves systematic recording, classifying, summarizing and reporting of financial transactions.

b) A financial information system

It provides financial information to different users for decision-making.

c) Quantitative in nature

Accounting records information that can be measured in monetary terms (money).

d) Based on rules and principles

It follows accounting principles, concepts, and standards (e.g., IFRS, IAS).

e) Historical and predictive

It records past transactions (historical) and helps forecast the future (predictive).

f) An art as well as a science

• Science because it uses rules (principles)

• Art because it involves judgment and estimation

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2. Purpose of Accounting

The purpose of accounting refers to why accounting is done. Accounting aims to:

a) Determine profit or loss

It helps find out if the business made a profit or incurred a loss over a period.

b) Show financial position

It shows assets, liabilities, and owner’s equity at a specific date (Statement of Financial Position).

c) Facilitate decision-making

Managers, owners, and other users rely on accounting information to make informed decisions.

d) Ensure proper record-keeping

Accounting keeps accurate and organized records of all transactions.

e) Aid in planning and control

• Planning future activities

• Controlling costs

• Budgeting

f) Provide information to stakeholders

Accounting provides information to:

• Owners

• Investors

• Government

• Creditors

• Management

• Employees

g) Ensure compliance

Helps businesses comply with laws, tax regulations, and reporting standards.

h) Safeguard assets

Accounting systems help to track and protect assets from loss or misuse.

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Short Summary (Exam-ready)

Accounting is a systematic process of recording, classifying, summarizing, and interpreting financial transactions. Its purpose is to determine profit or loss, show the financial position, help in decision-making, maintain proper records, assist planning and control, ensure compliance, and provide useful information to stakeholders.