Question 28 of 34intermediate💡 UnderstandLong Answer5 marks

What is accounting? Define its objectives.

Correct Answer

Meaning and Definition of Accounting

Accounting has been defined by various professional bodies over time. In 1941, the American Institute of Certified Public Accountants (AICPA) defined accounting as the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.

With greater economic development, the scope of accounting broadened. In 1966, the American Accounting Association (AAA) defined accounting as the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information.

Objectives of Accounting

As an information system, the basic objective of accounting is to provide useful information to interested groups of users, both external and internal. The primary objectives of accounting are as follows:

  1. Maintain records of business: Accounting keeps a systematic record of all financial transactions of an enterprise.

  2. Calculate profit or loss: It helps in determining the net result of business operations during a specific period through the profit and loss account.

  3. Depict the financial position: Accounting shows the financial condition of the business at a particular date through the balance sheet.

  4. Make information available to various groups and users: It provides necessary information in the form of financial statements to various stakeholders for decision-making purposes.

Exercise: Questions for Practice - Long Answers | Q: 1 | (Page 23)
For More Understanding

Explanation

This answer covers both parts of the question comprehensively. The definition section includes both the AICPA (1941) and AAA (1966) definitions which show the evolution of accounting. The objectives section lists all four primary objectives mentioned in the textbook context: maintaining records, calculating profit/loss, depicting financial position, and providing information to users. The answer is structured in 5 paragraphs with key terms bolded as required for a 5-mark long answer.

Solution Steps

  1. Step 1: Define accounting using both AICPA and AAA definitions from the textbook

  2. Step 2: Explain accounting as an information system

  3. Step 3: List and explain the four primary objectives: maintaining records, calculating profit/loss, depicting financial position, and making information available to users

  4. Step 4: Structure answer in 4-5 paragraphs with key terms bolded for exam presentation

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