Why Do Organisations Prepare Accounts?

In a previous post, I discussed some basic accounts concepts. This post takes you a step further. It discusses why organisations prepare accounts.

Doing business is good, in fact very good. But, why keep record of every business transaction? Why use a standard set of principles for that matter?

Doing business is already expensive. Why incur cost on accounting and accountants? Before thinking further, consider the following questions:

• Waqas is running a flower shop. He thinks he needs an employee. But, he is not sure whether he can afford one.
• Faiza owns a beauty salon. She want to sell it. But, she doesn’t know the value of her business.
• Akram understands the importance of discounts. But, he does not know whether he should offer it to customers. 
• Fawad and Salman are partners in a business. Fawad wants to draw money from business. Salman thinks it would be unwise to do so. He thinks financial position of the business is not good at present. But, he doesn’t know how to convince Fawad.
• Waqas wants to obtain bank loan for his business. His banker wants to determine the maximum loan he could offer to Waqas. But they do not have enough financial information for that.
• Saad wants to purchase a general store. But, he does not know what should be offer price.

The above list covers only a few questions. The list of questions which organizations face is quite long. You will notice that all questions relate to financial decision making. More precisely these decisions can be called the economic decisions.

Economic decisions does not relate only to the owner. Other persons also want information about your business. These other persons are stakeholders. In accounting, we call these stakeholders ‘users of financial statements’.

Stakeholders want to make economic decisions about business. This is only possible, if they have the financial statements. Financial statements cater to the needs of many stakeholders. They are normally prepared using a standard set of principles. That is why, financial statements are also known as ‘general purpose financial statements’. It is important to note that general purpose financial statements do not and cannot meet information needs of all users.

So, the objective of general purpose financial statements is:

to provide financial information about the business organization that is useful to its different stakeholders

Conceptual framework for financial reporting sheds more light on objective of financial statement.