FOUNDATIONS OF ACCOUNTING sampleFullscreen Mode
TOPIC 1
INTRODUCTION TO ACCOUNTING
NATURE AND PURPOSE OF ACCOUNTING
Accounting is considered the language of business. It has evolved throughout the years as information needs changed and became more complex. After finishing this article, the reader should be able to have a general understanding about accounting, be acquainted with the different definitions, know the different types of information found in accounting reports, and know the different uses of accounting information.
Some say that accounting is a science because it is a body of knowledge which has been systematically gathered, classified, and organized. It could be influenced by a lot of factors, specifically by economic, social and political events. Some say that accounting is an art because it requires creative skill and judgment. Furthermore, accounting is also considered as an information system because it is used to identify and measure economic activities, process the information into financial reports, and communicate these reports to the different users of accounting information.
To further understand what accounting is, we must take a look at the different definitions.
The first definition emphasizes the following:
Identifying – in accounting, this is the process of recognition or non-recognition of business activities as accountable events. Stated differently, this is the process which determines if an event has accounting relevance.
Measuring – in accounting, this is the process of assigning monetary amounts to the accountable events.
Communicating – As we could notice with the above definitions, one main similarity between the three is the impact of communication. In order to be useful, accounting information should be communicated to the different decision makers. Communicating accounting information is achieved by the presentation of different financial statements.
The second definition emphasizes the following:
Recording – The accounting term for recording is journalizing. All the accountable events are recorded in a journal.
Classifying – The accounting term for recording is posting. All accountable events that are recorded in the journal are then classified or posted to aledger.
Summarizing – the items that are journalized and posted are summarized in the five basic financial statements.
The third definition emphasizes that accounting is a service activity and that Information provided by accounting could be classified into 3 types:
Quantitative information – this is information that is expressed in numbers, quantities or units
Qualitative information – this is information that is expressed in words
Financial information – this information is expressed in terms of money
Therefore, given the definitions, accounting is a service activity that is all about recording, classifying and summarizing accountable events in order to communicate quantitative, qualitative, and financial economic information, to different users in order to make relevant decisions.
OBJECTIVES OF ACCOUNTING
The objectives of accounting can be given as follows:
Systematic recording of transactions – Basic objective of accounting is to systematically record the financial aspects of business transactions i.e. book-keeping. These recorded transactions are later on classified and summarized logically for the preparation of financial
statements and for their analysis and interpretation.
Ascertainment of results of above recorded transactions – Accountant prepares profit and loss account to know the results of business operations for a particular period of time. If revenue exceeds expenses then it is said that business is running profitably but if expenses exceed revenue then it can be said that business is running under loss. The profit and loss account helps the management and different stakeholders in taking rational decisions. For example, if business is not proved to be remunerative or profitable, the cause of such a state of affair can be investigated by the management for taking remedial steps.
Ascertainment of the financial position of the business – Businessman is not only interested in knowing the results of the business in terms of profits or loss for a particular period but is also anxious to know that what he owes (liability) to the outsiders and what he owns (assets) on a certain date. To know this, accountant prepares a financial position statement popularly known as Balance Sheet. The balance sheet is a statement of assets and liabilities of the business at a particular point of time and helps in ascertaining the financial health of the business.
