Objectives of Financial Accounting Systems

There are many objectives of maintaining a financial accounting system in an organization and they can be explained as follow:

  • Help in Management Decision Making.

Financial accounting system records all the transactions happening in the organization on a day to day basis. To make decisions managers need information.  Necessary information can be generated through financial accounting system as it record actual transactions happening in the company.

  • Provide Information to Potential and Present Investors to Make Their Investment Decisions.

Investors expect a return on the investment they make. If the return is satisfactory they hold/buy the investment. If it is not satisfactory they sell the investment. To decide whether to buy/hold or sell the investment investors need information. This investment information can be generated through financial accounting system.

  • Meet Legal Obligations.

In certain countries, it is a legal obligation of the companies to maintain ledger accounts and final accounts. In some countries, it is a legal obligation of the companies to carry out an independent audit to obtain an opinion about financial statements.  Companies are under obligation to provide necessary accounting information to tax authorities to calculate the tax liability of the organization.

  • Forecast Future Performance.

When forecasting future performance,  the organization needs to analyze the past information to find out the trend. For an example, if the company wants to forecast sales for a future period they need the past sales records to identify the trend. In such a situation relevant information can be generated through financial accounting system.

  • To Carry Out Performance Appraisal and Exercise Control.

At the year end, the organization needs to appraise the performance of employees and reward them accordingly. Any favourable situations must be highlighted to motivate employees. If there are any deviations from the budget they have to take corrective actions to avoid any such situations in the future. When comparing budgeted information with actual information, actual information can be generated through financial information.

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13 thoughts on “Objectives of Financial Accounting Systems”

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