What Is Accounting?
Accounting consists of three basic activities-it identifies, records and communicates the economic events of an organization to interested users.
- Identifies. A company identifies the economic events relevant to its business.
- Records. Recording consists of keeping a systematic, chronological diary of events, measured in monetary units
- Communicates. Collected information to interested users by means of accounting reports. The most common of these reports are called financial statements. A vital element in communicating economic events is the accountant’s ability to analyze and interpret the reported information. The analysis involves the use of ratios, percentages, graphs, and charts to highlight significant financial trends and relationship. Interpretation involves explaining the uses, meaning and limitations of reported data.
Who Uses Accounting Data?
The specific financial information that a user needs depends upon the kinds of decisions the user makes. There are two board groups of users of financial information: internal users and external users.
- Internal users of accounting information are managers who plan, organize and run the business. These include marketing managers, production, supervisors, finance directors and company officers. Managerial accounting provides internal reports to help users make decisions about their companies.
- External users are individuals and organizations outside a company who want financial information about the company. The two most common types of external users are investors and creditors.
- Investors (owners) use accounting information to make decisions to buy, hold or sell ownership shares of the company.
- Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money.