Purpose of Accounting

  • The primary purpose of accounting is to provide information that is useful for decision-making
  • Accounting provides reliable information about the sources and trends of revenues within an enterprise
  • Accounting provides authenticated information about the economic resources and obligations of a business
  • Accounting provides reliable information about changes in the financial and investment activities of a business
  • Accounting gives reliable information to outsiders in the form of various disclosures, enabling them to assess the credibility of the business

Characteristics of Accounting

Accounting in the modern era is marked by the following characteristics:

  • Since accounting deals with uncertainty and complexity, professional judgment and estimates are imperative
  • Accounting statements can be prepared on:
  • Accounting is by nature historical which means the recording of past happenings

Advantages of Accounting

  • Accounting gives valuable information for making managerial decisions
  • It provides helpful information to investors for estimating the risk, gains, and opportunities associated with a business
  • Accounting provides critical information to creditors who are worried about their claims on the business
  • It provides useful information about the management’s ability to achieve the maximum benefit from limited resources
  • Accounting also provides information to the business that can be helpful to increase its earning capacity

Frequently Asked Questions

Why is it important for companies to have an understanding of the economy?

An entity must understand how macroeconomic variables influence its operating environment. For example, the business may need to adjust staffing levels in response to changing trends in consumer spending or unemployment rates. The business may also be interested in making investments that are influenced by interest rates and inflation rates.

What are the three primary functions of accounting?

The three primary functions of accounting are recording, classifying, and summarizing financial events. Recording refers to the process of documenting each business transaction in a journal or ledger. Classification refers to organizing transactions into accounts according to type of transaction (e.g., cash receipts, cash payments, Accounts Receivable, office supplies, etc.). Summarizing refers to the process of making tallies and using these tallies to prepare Financial Statements such as income statements and balance sheets.

What types of transactions do accounting focus on?

Accounting focuses on economic events that involve the exchange of items of value. These items can be tangible assets such as cash, inventory, and equipment. They can also be intangible assets such as loans receivable and goodwill. When a transaction takes place - whether it is congruent or incongruent with the business's objectives - the associated financial effects must be recorded in order to provide a fair representation of the business's financial position.

How often is the income statement prepared?

The income statement is generally prepared on a monthly basis. This does not mean that every month will have 12 months of sales or 12 months of expenses. It just means that most companies prepare their income statements once per month, year after year. Profit is computed by taking total sales less total expenses.

What is a balance sheet?

A balance sheet provides a "snapshot" of the business's financial condition by listing its assets, liabilities, and equity on a specific date. Assets are things that belong to the business and have value (for example, cash, receivables). Liabilities are claims against the business by creditors or debt holders (for example, accounts payable, bank loans). Equity is the owner's claim to assets.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.