Accounting and Bookkeeping

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What is Accounting?

Accounting is often characterized as "the language of business." The acceleration of change in our complex society has contributed to ever-increasing complexities in this "language", which is used in recording and interpreting basic economic data for individuals, businesses, governments, and other entities. Sound decisions, based on reliable information, are essential for the efficient distribution and use of scarce resources. Account­ing, therefore, plays a very important role in our economic and social system.

Because of the wide range of accounting activity, there is no concise description of accounting. Accounting is concerned with recording, sorting, and summarizing data related to business transactions and events. Such data are to a large extent, but not exclusively, of a financial nature and are frequently, but not always, stated in monetary terms. Accounting is also concerned with reporting and interpreting the data. Accounting has been defined broadly as the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

Accounting is a service activity. Its function is to provide quantitative information about economic entities. The information, essentially financial in nature, is primarily provided by reports referred to as financial statements and is intended to be useful in making economic decisions. These reports are used in describing the activities and financial status of many different kinds of economic entities. They include hospitals, schools, cities, governmental agencies, and profit-oriented businesses.

The objective of financial statements is to communicate information that is useful to investors, creditors and other users in making resource allocation decisions and/or assessing management stewardship.

Consequently, financial statements provide information about:

(a) an entity's economic resources, obligations and equity;

(b) changes in an entity's economic resources, obligations and equity; and

(c) the economic performance of the entity.

In making decisions about an economic entity, individuals generally must begin by asking questions about the entity. The answers to many such ques­tions are found in accounting reports. If, for example, the entity is a business, the managers of the business would look to accounting for answers to questions such as:

What are the resources of the business?

What debts does it owe?

Does it have earnings?

Are expenses too large in relation to sales?

Is too little or too much merchandise being kept?

Are amounts owed by customers being collected rapidly?

Will the business be able lo pay its debts as they mature?

Should the plant be expanded?

Should a new product be introduced?

Should selling prices be increased?

In addition, grantors of credit such as banks, wholesale houses, and manufacturers use accounting information in answering such questions as:

Are the customer's earning prospects good?

What is its debt-paying ability?

Has it paid its debts promptly in the past?

Should it be granted additional credit?

Likewise, governmental units use accounting information in regulating businesses and collecting taxes. Labour unions use it in negotiating working conditions and wage agreements. And last but certainly not least among the users of accounting information are individual investors, who make wide use of accounting data in their investment decisions.

Accounting and Bookkeeping

Many people confuse accounting and bookkeeping and look on them as one and the same. In effect, they identify the whole with one of its parts. Actually, bookkeeping is only part of accounting, the record-making part. To keep books is to record transactions, and a bookkeeper is one who records transac­tions either on a computer or manually or with a bookkeeping machine. Ac­counting includes much more than this. The accountant should have the ability to design the accounting system; to analyze and record complex, nonroutine transactions; and to analyze and interpret accounting information.

Date: 2016-01-14; view: 846