What Is Accounting?

ACCOUNTING

WHAT IS ACCOUNTING?

➢ A service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.

➢ The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least financial character and interpreting the results thereof.

NATURE OF ACCOUNTING

1. A Discipline

 Accounting is a discipline that observes professional standards and professional ethics as other fields of professions like medicine, law, engineering, and others.

 Accounting practice is guided by distinctive accounting standards, rules, methods and procedures to come up with reliable general-purpose financial reports.

2. A Service Activity

 It is involved in providing professional services particularly in performing tasks by making financial reports regarding the financial activities of economic entities.

3. An Art and Science

 As an art, accounting is designed to perform its service activity with utmost efficiency and in the best possible manner without any wastage of time and money. It encompasses a body of techniques that is commonly used in a certain profession.

 As a science, it is regulated by accounting ruled, principles, postulates and theories. It follows a cause and effect relationship as shown by the double-entry system that in every transaction it has a double-effect. If one account is debited, the other account will be credited automatically.

4. The Language of Business

 Accounting serves as a means of communication. It communicates the results of business operations to various parties (owners, lenders, investors, government, employees, and other agencies) who are directly or indirectly interested on the economic status of a affairs of the business.

 It informs them the economic status of the business organization through financial reports.

 It serves to provide the basis for planning, budgeting, and decision-making in every personal life and business activities.

5. The Eyes of the Business

 Bookkeeping records, as the initial part of accounting activities, enable the owner of a business to check on the financial progress.

 Adequate accounting records assist the owner to prepare plans for the future, avoid material mistakes, analyze the causes of changes that take place, and draw the best choice among economic alternatives.

FUNCTIONS OF ACCOUNTING

PRIMARY FUNCTIONS

1. Recording

 This accounting function is employed to ensure that all business transactions are recorded in a systematic manner in property books of accounts. The recording is done in the “Journal Book” and subsidiary books such as cash journal, purchase journal, and sales journal. Only transactions that are financial in nature are recorded in the books of accounts.

2. Classifying

 It is concerned with systematic analysis of recorded business transactions and events, with a view to group those that are similar in nature as one cluster in an accounting elements called Assets, Liabilities, or Capital. It is done in the “Ledger Book”.

3. Summarizing

 Presenting the classified data in a manner which is understandable and useful to the end-users of accounting information. This process leads to the preparation of the (a) Trial Balance, (b) Statement of Comprehensive Income and (c) Statement of Financial Position.

4. Analyzing and Interpreting

 Final function of accounting. The recorded financial data are analyzed and interpreted in a manner that the end-users can make a meaningful judgment about the financial condition and profitability of the business operations.

5. Communicating

 After being meaningfully analyzed and interpreted, the accounting information has to be communicated to the intended end-user. This is done through the distribution of accounting reports such as the Financial Statements, including additional information in the form of accounting ratios, graphs, diagrams.

6. Protecting the property of Business

 Accounting evaluates the usefulness of business resources. It provides internal control to secure them and ensure that unauthorized use of business property shall not be made.

7. Preparing legal requirements.

 Accounting facilitates the preparation of governmental reportorial requirements and ensures compliance of report on time. Accounting records and supporting documents serves as proofs of real transactions as contained in the financial reports.

PURPOSE OF ACCOUNTING

 The purpose of accounting is to help end-users see the true picture of the business in financial terms.

 To achieve this purpose, the financial reports prepared by accountants must be understandable, relevant, reliable, and for general-purpose. It must contain information that is complete, neutral, and free from error. It is achieved when financial statements are made in conformity with prevailing accounting standards called the “generally accepted accounting principle”. (GAAP)

OBJECTIVES OF ACCOUNTING

➢ The overall objective of financial reporting is to provide general-purpose financial statements about the reporting entity that is useful to present potential user groups, especially stockholders and creditors to assist in making sound economic decisions as capital providers.

1. To ascertain the results of operations during a period.

2. To ascertain the financial position

3. To maintain control over assets.

4. To aid management in planning and performance evaluation

5. To provide information to government agencies and other legal purposes.

USERS OF ACCOUNTING INFORMATION

1. The Management Group (Internal Users)

a. Owner

b. Managers

2. The financing Group and Public Group

a. Investors

b. Employees

c. Lenders

d. Suppliers and trade creditors

e. Customers

f. Government and its agencies

g. Public

BUSINESS ORGANIZATIONS SERVED BY ACCOUNTANTS

1. Sole or Single Proprietorship

 Owned by a single person called sole proprietor.

2. Partnership

 A business entity owned by two or more persons called partners who have agreed to contribute money, property and industry to a common fund with the intention of dividing the profits among themselves.