The Nature and Purpose of Accounting
Definition Accounting is defined as the process of identifying, measuring and reporting economic information to the users of this information to permit informed judgment
Many businesses carry out transactions. Some of these transactions have a financial implication i.e. either cash is received or paid out. Examples of these transactions include selling goods, buying goods, paying employees and so many others.
Accounting is involved with identifying these transactions measuring (attaching a value) and reporting on these transactions. If a firm employs a new staff member then this may not be an accounting transaction. However when the firm pays the employee salary, then this is related to accounting as cash involved. This has an economic impact on the organization and will be recorded for accounting purposes. A process is put in place to collect and record this information; it is then classified and summarized so that it can be reported to the interested parties.
The main purpose of Accounting is to provide financial information about an economic entity. It provides a means where the steward reports to the owner how the funds entrusted to him are used to enhance the wealth of the business.
Business Transaction is an event which involves the transfer of money or money’s worth of financial events. The following summarises the business transaction that a firm might have:
- Acquisition of assets from owners and other creditors
- Investing resources in assets to produce goods or services
- Using resources to produce goods and services
- Selling goods or services of the firm
- Paying those to whom money is owned
- Returning assets to owners
Difference between Book-Keeping and Accounting
Book-keeping means the recording of transactions of a business in methodical manner so that information relating to them may be quickly obtained. It intends to be mechanical and repetitive.
Accounting includes the design of accounting system, preparation of financial statements, and development of budgets, cost studies, audits, income tax work, and computer applications to accounting processes and the analysis and interpretation of accounting information as an aid to making business decision.
Types of Business Firms
- Proprietorship—a business owned by one person
- Partnership—co-owned by two or more persons
- Limited Companies—owned by investors called stockholders (The business—not the owners—are responsible for the company’s obligations.)
1.2 Users of Accounting Information
Accounting information is produced in form of financial statement. These financial statements provide information about an entity financial position, performance and changes in financial position.
Financial position of a firm is what the resources the business has and how much belongs to the owners and others.
The financial performance reflects how the business has performed, whether it has made profits or losses. Changes in financial positions determine whether the resources have increased or reduced.
The users of accounting information have an interest in the existence of the firm. Therefore the information contained in the financial statements will affect the decision making process.