Usage of Accounting Information

Accounting is the vehicle for reporting financial information about a business entity to many different groups of people.

Learning Objective

Explain the history of accounting and how accounting information is useful

Key Points

The American Accounting Association defines accounting as "the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information."
Accounting involves two main elements: (1) an information process summarizing financial events; and (2) a reporting system that communicates financial information to interested parties.
Double-entry bookkeeping first emerged in Northern Italy in the 14th century, where trading ventures began to require transactions that involved more than one investor.
Management (or internal) accounting and financial (or external) accounting are generally the two key branches of accounting.
Management accounting provides relevant and useful information to people inside the business, such as employees, managers, owners and auditors. It provides information for decision making and company strategy.
Financial accounting, on the other hand, also provides information to people outside the business, such as investors, regulators, analysts, economists, and government agencies.

Terms

double-entry bookkeeping
A method of bookkeeping in which each transaction must have at least one debit and one credit.
Financial statements
Standardized documents that include the financial information of a person, company, government, or organization; this information is used to make financial decisions.
accounting
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. (definition by the American Accounting Association)
stakeholders
People outside of a company who have a special interest in the company. Some examples are suppliers, customers, and the community.

Full Text

Using Accounting Information

The American Accounting Association defines accounting as "the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information." In other words, it is the process of communicating financial information about a business entity to stakeholders and managers. Economic information is generally displayed in the form of financial statements that show the economic resources that a business currently has; the goal of the business is to determine which information is useful to the outside world.

Accounting involves two main elements:

An information process that identifies, classifies and summarizes the financial events that take place within an organization
A reporting system that communicates relevant financial information to interested persons, allowing them to assess performance, make decisions, and/or control the economic resources in the organization.

It is important to note that accounting is not the end of the decision making process; it provides the most relevant and reliable information possible to allow for goals to be developed, implemented, and revised.

Accounting History

Early accounts served mainly to assist a businessperson in recalling financial transactions. The proprietor or record keeper was usually the only person to see this information. Cruder forms of accounting were inadequate when a business needed multiple investors. As a result, double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest.

The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide additional information. This development resulted in the division of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes. This also led to the separation of internal and external accounting and disclosure regulations.

Accounting Today

Today, accounting is referred to as "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting. It is used to provide information to employees, managers, and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions.

Accounting that provides information to people outside the business entity is called financial accounting. It provides information to present and potential shareholders, creditors, vendors, financial analysts, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP. The International Financial Reporting Standards, or IFRS, provides another set of accounting rules.

Accounting

Accounting allows a business to track its financial information.

[ edit ]

Prev Concept

Sample Evaluation

Managerial Accounting

Next Concept