Accounting Information

The American Institute of Certified Public Accountants (AICPA) define accounting as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof".

The American Accounting Association define accounting as "the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information".

The definition of accounting by the American Accounting Association seems easier to understand, so let's take a closer look at that definition.

Accounting provides information to other people. That information is economic information which relates to the financial or economic activities of the business.

That accounting information needs to be identified and measured. This is done by a set of accounts which is based on an accounting system known as double-entry bookkeeping. The accounting system identifies and records  accounting transactions.

The measurement of accounting information is not that simple. It requires that judgements be made about the value of assets owned by a business and the value of liabilities owed by a business. It also involves accurately measuring the profit or loss of a business over a set period of time. The measurement of accounting information usually requires subjective judgement to arrive at a conclusion.

Accounting information also needs to be communicated. This requires an understanding of who needs the accounting information and what they need that information for. Accounting information is communicated through financial statements.

There are two main reasons for financial statements:

1. To report on the financial position of an entity (business or organization)

2. To show how the entity has performed financially over a particular period of time or accounting period.

The most common measurement of performance is profit.

Accounting has been called the "language of business" because it is the way to report fnancial information about a business to a diverse group of people.

There are two main types of accounting:

1. Management accounting (for internal purposes)

2. Financial accounting (for external disclosure).

Management accounting is used to provide financial information to people within the business such as managers, employees, and auditors. Management accounting is used to make decisions on the operation of the company.

Financial accounting provides financial information to people outside of the company such as shareholders, banks, financial analysts, government agencies, and economists. Due to different needs, financial accounting is very structured and is governed by more rules which follow the Generally Accepted Accounting Principles (GAAP).

Even though the type of information that is presented in financial and management accounts is different, the objective is the same. That is to provide financial information to the user.

The financial information includes the following:

1. Collection in money terms relating to transactions that have resulted from business operations.

2. Recording and classifying data into a permanent and logical form known as book-keeping.

3. Summarizing data to produce reports and statements that will be useful to both the internal and external users of the accoungint information.

4. Interpreting and communicating the performance of the businesss to the owners and managers.

5. Forecasting and planning for future operations. The main forecasting and planning tool is the budget.

The process where accounting information is collected, reported, interpreted, and actioned is called Financial Management.

The main objectives of financial management for a business would be:

1. Create wealth for the business

2. Generate cash

3. Provide an adequate return on investment