January 31, 2010
ACC/280 Principles of Accounting
Accounting is a systematic proocess that identifies, records, and communicates the economic events of an organization to interested users (Weygandt, 2008). The financial information gathered is used to determine a company’s financial status and provide reports and insights needed to make sound financial decisions. The purpose of accounting is to provide economic financial information for investor, creditors, and other external users. Accounting identifies and records all activities that effect the organization financially. Accounting is a means of communicating the numbers.
Retained Earnings Statement – summarizes the changes in retained earnings that have occurred for a specific period of time (Weygandt, 2008).
Balance Sheet – reports the assets, liabilities, and stockholders’ equity of a business usually the month-end or year-end period (Weygandt, 2008).
Statement of Cash Flow – summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period. The statement of cash flows reports the cash effects of a company’s operations during a period, its investing transactions, its financial transactions, the net increase or decrease in cash during the period and the cash amount at the end of the period. It provides answers to important questions that investors, creditors, and others want to know regarding what is happening to a company’s most liquid resource (Weygandt, 2008).
The income statement, retained earnings statement, and statement of cash flows are all for a period of time. The balance sheet is for a point in time (Weygandt, 2008). The financial statements are all interrelated with each other by providing the necessary means of information to make decisions about their companies. Each statement provides relevant financial data for internal and external users.
Shareholders, customers, suppliers, lenders, employees, organizations, and society are potential users of accounting information. A stakeholder is a person with an interest in the performance and activities of an organization. Accounting consists of internal users and external users. Internal users are those individuals inside a company who plan, organize, and run the business. These include marketing managers, production supervisors, finance directors, and company officers.
External users are individuals and organizations outside a company who want financial information about the company. There are several types of external users. The two most common types are investors and creditors. Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Two broad types of accounting information are financial accounts and management accounts. Financial accounts are geared toward external users and management accounts are aimed more at internal users of accounting information.
When preparing accounting information, care should be taken to ensure that the information represents an accurate and true view of the business performance and position.
Abeysinge, R.L. (2010). What is the Purpose of Accounting?. Retrieved from http://accounting-support.blogspot.com/2009/10/purpose-of-accounting.html
Weygandt, J.J. (2008). Financial Accounting (6th ed.). Hoboken, , NJ: John Wiley & Sons.
What is the Purpose of Accounting? Retrieved January 28, 2011 from...