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Friday, October 16, 2009

The Purpose of Accounting

Accounting is a way of recording, analyzing, and summarizing transactions of a business.
  • The transactions are recorded in “books of prime entry”
  • The transactions are than analyzed and posted to the ledger
  • Finally the transactions are summarized in the financial statements

The need of Accounts
If business runs efficiently, why it have to go through all the bother of accounting procedures in order to produce financial information?
A business should produce information about its activities because there are various groups of people who want or need to know that information. This sounds rather vague, to make it clearer, we should look more closely at the classes of people who might need information about a business. We need also to think about what information in particular is of interest to the members of each class.

Users if financial statements and accounting information
The people who might be interested in financial information about a large public company may be classified as follows,

  • Managers of the company.
  • Shareholders of company.
  • Trade contacts.
  • Providers of finance to the company.
  • The Inland Revenue.
  • Employees of the company.
  • Financial analysts and advisers.
  • Government and their agencies.
  • The public.

Accounting information is organized into financial statements to satisfy the information needs of these different groups,

Non commercial undertakings
It is not only businesses that need to prepare accounts, Charities and Clubs also prepare financial statements every year. Accounts also need to be prepared for public sector organization.

The Main Financial Statements
Transactions are summarized in the financial statements. The two main financial statements are the Balance sheet and the Profit and loss account. Both of the balance sheet and the profit and loss account are summaries of accumulated data.

The balance sheet – is simply a list of all the assets owned and all the liabilities owned by a business as at a particular date. It shows the financial position of the business at a particular moment.
A profit and loss account – is a record of income generated and expenditure incurred over a given period.
The period chosen will depend on the purpose for which the statement is produced, that time called finance year.


Unknown said...

nice notes

aliyaa said...

We need also to think about what information in particular is of interest to the members of each class. Also statement of cash flows should be clear.

Uhlenbrock CPA said...

Nice blog post. Thanks for sharing details about purpose of accounting.
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