The purpose of accounting:
The purpose of accounting may have one summarized purpose or it may serve a lot of purposes but it is very important. It has always been since the accounting system was created.
An economic entity is a separately identifiable organization which makes use of resources to achieve its goals and objectives.
An economic entity may be a business entity operating with the primary objective of generating profit, or a non-profit entity carrying out charitable and not-for-profit operations.
The Purpose of Accounting Explained:
A straightforward answer would be: it is clear that the ultimate purpose of accounting is to provide information to different users. The users use the information in order to make informed economic decisions.
You can actually see the purpose of accounting by going through the definitions that all the major firms or boards give you and put it together. The American Institute of Certified Public Accountants (AICPA) explains it in this way:
“Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, in making reasoned choices among alternative courses of action.”
After that one, we have another definition. This one has been in use for quite a long time already. The American Accounting Association (AAA) uses the following explanation:
- “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.”
Both of these definitions and the very nature of accounting gives you a hint at its basic purpose. To provide information needed by users in making economic decisions.
- Results of operations: This is the profit or loss generated by the business and the impact it has on the business’s economic activities.
- Financial position: The total assets, liabilities and capital of the business.
- Solvency and liquidity. Solvency refers to the entity’s ability to pay obligations when they become due. Liquidity pertains to its ability to meet short-term obligations.
- Cash flows: The financial statements also show the income and expenditure of cash in the different activities of the business.
- Other information: The financial statements provide qualitative, quantitative, and financial information. All of the statements are relevant to each other because they will influence the decisions of the shareholders, directors or management.