Financial Accounting 1 Notes

1. NATURE AND PURPOSE OF ACCOUNTING

NATURE AND PURPOSE OF ACCOUNTING

-Accounting is considered the language of business. It has evolved throughout the years as

information needs changed and became more complex.

-After finishing this article, the reader should be able to have a general understanding about accounting, be acquainted with the different definitions, know the different types of information found in accounting reports, and know the different uses of accounting information.

-Some say that accounting is a science because it is a body of knowledge which has been

systematically gathered, classified, and organized. It could be influenced by a lot of factors,

specifically by economic, social and political events.

-Some say that accounting is an art because it requires creative skill and judgment. Furthermore, accounting is also considered as an information system because it is used to identify and measure economic activities, process the information into financial reports, and communicate these reports to the different users of accounting information.

-To further understand what accounting is, we must take a look at the different definitions.

The first definition emphasizes the following:

 Identifying - in accounting, this is the process of recognition or non-recognition of business

activities as accountable events. Stated differently, this is the process which determines if an

event has accounting relevance.

 Measuring - in accounting, this is the process of assigning monetary amounts to the

accountable events.

 Communicating - As we could notice with the above definitions, one main similarity

between the three is the impact of communication. In order to be useful, accounting

information should be communicated to the different decision makers. Communicating

accounting information is achieved by the presentation of different financial statements.

-The second definition emphasizes the following:

 Recording - The accounting term for recording is journalizing. All the accountable events are

recorded in a journal.

 Classifying - The accounting term for recording is posting. All accountable events that are

recorded in the journal are then classified or posted to a ledger.

 Summarizing - the items that are journalized and posted are summarized in the five basic financial statements.

-The third definition emphasizes that accounting is a service activity and that Information provided

by accounting could be classified into 3 types:

 Quantitative information - this is information that is expressed in numbers, quantities or

units

 Qualitative information - this is information that is expressed in words

 Financial information - this information is expressed in terms of money

Therefore, given the definitions, accounting is a service activity that is all about recording,

classifying and summarizing accountable events in order to communicate quantitative, qualitative,

and financial economic information, to different users in order to make relevant decisions.