Nature and Purpose of Accounting

Accounting is the backbone of every business organization, especially banks and financial institutions. In banking exams like JAIIB and CAIIB, understanding the nature and purpose of accounting is very important because banking operations are fully based on financial transactions, records, reporting and compliance.

Meaning of Accounting

Accounting is the systematic process of:

  • Recording financial transactions
  • Classifying them
  • Summarising them
  • Interpreting the results
  • Communicating financial information to users

The American Institute of Certified Public Accountants (AICPA) defines accounting as:

“The art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are of financial character and interpreting the results thereof.”

In simple words, accounting means keeping proper records of money-related transactions and preparing financial statements to show the financial position and performance of a business.

In banks, accounting is even more important because banks deal with public money, deposits, loans, interest income, investments, and regulatory compliance.

Nature of Accounting

The nature of accounting explains the basic characteristics and features of accounting. It shows what accounting actually is.

1. Accounting is Both an Art and a Science

  • It is an art because it requires skill, knowledge and judgment in recording and presenting financial information.
  • It is a science because it follows systematic rules, principles and concepts (such as accounting standards and GAAP).

For example, choosing depreciation method requires judgment (art), but recording it follows accounting rules (science).

2. Accounting is a Systematic Process

Accounting follows a proper sequence:

  • Identifying transactions
  • Recording in journal
  • Posting to ledger
  • Preparing trial balance
  • Preparing final accounts

It is not random. It is structured and organized.

3. Accounting Deals Only with Financial Transactions

Accounting records only those transactions which:

  • Can be measured in monetary terms
  • Affect financial position of business

For example:

✔ Sale of goods – recorded
✔ Payment of salary – recorded
✘ Appointment of manager – not recorded (unless salary is paid)

This is called the Money Measurement Concept.

4. Accounting is Historical in Nature

Accounting mainly records past transactions. It shows what has already happened.

For example:

  • Sales made last month
  • Expenses paid during the year
  • Loans disbursed by a bank

However, financial statements help in future decision-making.

5. Accounting is Based on Principles and Standards

Accounting follows:

  • Accounting Principles
  • Accounting Standards
  • Regulatory guidelines (especially in banking sector)

Banks in India follow guidelines issued by the Reserve Bank of India and ICAI accounting standards.

6. Accounting is a Language of Business

Accounting communicates financial results to:

  • Owners
  • Management
  • Investors
  • Government
  • Creditors
  • Regulators

Just like language helps people communicate, accounting helps businesses communicate financial performance.

7. Accounting is Continuous Process

Accounting does not stop. It is carried on throughout the life of the business.

Banks record transactions daily because:

  • Deposits are received daily
  • Loans are disbursed daily
  • Interest is calculated regularly

Functions of Accounting

To understand the nature better, we must understand what accounting does.

Recording

All financial transactions are first recorded in books of accounts.

Classifying

Transactions are grouped under proper heads like:

  • Assets
  • Liabilities
  • Income
  • Expenses

Summarising

Preparation of:

  • Trial Balance
  • Profit & Loss Account
  • Balance Sheet

Analysing and Interpreting

Financial data is analysed to understand:

  • Profitability
  • Liquidity
  • Solvency
  • Efficiency

This is very important in banking exams.

Purpose of Accounting

Now let us understand why accounting is done. The purpose explains the objective or aim of accounting.

1. To Maintain Systematic Records

The primary purpose is to maintain proper and permanent records of transactions.

Without accounting:

  • There will be confusion
  • Fraud risk increases
  • Financial position cannot be known

Banks must maintain accurate records because they deal with public funds.

2. To Ascertain Profit or Loss

Accounting helps to determine:

  • Whether business earned profit
  • Or suffered loss

This is done through preparation of Profit & Loss Account.

For banks, profit includes:

  • Interest income
  • Fee income
  • Treasury income

Expenses include:

  • Interest paid on deposits
  • Salary
  • Operating expenses

3. To Know Financial Position

Accounting helps to prepare Balance Sheet which shows:

  • Assets
  • Liabilities
  • Capital

It tells whether business is financially strong or weak.

For banks, financial position is very important for:

  • Capital adequacy
  • Liquidity management
  • Regulatory compliance

4. To Provide Information to Users

Different users need accounting information:

  • Management – for decision making
  • Investors – for investment decision
  • Government – for taxation
  • RBI – for supervision
  • Customers – for trust

Thus accounting ensures transparency.

5. To Help in Decision Making

Accounting data helps management in:

  • Cost control
  • Budgeting
  • Investment decisions
  • Expansion planning

In banking, data helps in:

  • Loan pricing
  • Risk management
  • NPA monitoring

6. To Meet Legal Requirements

Companies and banks are legally required to maintain books of accounts under law.

Banks in India follow:

  • Banking Regulation Act
  • Companies Act
  • RBI guidelines

Accounting ensures compliance with these laws.

7. To Prevent and Detect Fraud

Proper accounting system:

  • Creates audit trail
  • Maintains internal control
  • Reduces fraud risk

In banking, fraud prevention is extremely important.

8. To Facilitate Audit

Accounting records are examined by:

  • Internal auditors
  • Statutory auditors
  • RBI inspectors

Without proper accounting, audit cannot be conducted.

Objectives of Accounting (Exam Perspective)

Remember these objectives clearly:

  • To maintain systematic records
  • To ascertain profit or loss
  • To ascertain financial position
  • To provide financial information
  • To protect assets
  • To assist management

These are frequently asked in objective and descriptive questions.

Importance of Accounting in Banking Sector

In banks, accounting has special importance because:

  • Banks deal with public deposits
  • They must maintain CRR and SLR
  • Income recognition and asset classification (IRAC norms) must be followed
  • Financial statements are closely monitored by Reserve Bank of India

Bank accounting includes:

  • Interest calculation
  • Provisioning for NPAs
  • Treasury accounting
  • Investment classification

Hence, accuracy in accounting is critical in banking.

Conclusion

Accounting is the systematic process of recording and presenting financial information. Its nature shows that it is scientific, systematic, monetary-based and continuous. Its purpose is to determine profit, financial position, and provide useful information to various stakeholders.