Accounting

The Purpose of Accounting

The dictionary defines accounting as providing a record of funds being paid or received for a business. Accounting consists of identifying, recording and communicating the economic events of a company or organization to interested parties.

By identifying economic events, a company selects events that are pertinent to the business. Examples could be sales of computers by Dell, paying wages by American Airlines, and measuring the amount of oil flowing from the well by BP. Once the events are identified by the company they are recorded to be able to provide an account of the financial activities. By recording, the company is keeping a time line of events measured monetarily. Many companies also classify and summarize the events as well during recording. The final step of communication is where the company provides the information to interested users by reports called accounting reports. The most common type of reports is financial statements. There are two types of users who require the financial information of a business: internal and external users.

Internal users are people inside a company who basically run the business. They can include finance directors and marketing managers for example. They deal with accounting questions like, “can we afford to provide raises this year?” and “are there any product lines that need to be eliminated?”. In order to answer these questions, internal users must have the financial information in a timely manner.

External users are people outside the company who want the financial information. They are usually investors and creditors. Investors use the information to make decisions based on buying and selling stock in the company. Creditors use the information to determine the risks involved in lending money to the company. They usually ask questions like “How are these two companies comparable?” and “will the company be able to...