Introduction to Accounting

Accounting is the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.

The end product of financial accounting is the preparation of financial statements such as the Profit and Loss Account and Balance Sheet.

The main objectives of accounting are:

1. Maintenance of records of business transactions — to keep a systematic record of all financial transactions.
2. Calculation of profit and loss — to ascertain the net result of business operations.
3. Depiction of financial position — to show the assets and liabilities of the business at the end of the accounting period.
4. Providing accounting information to users — to supply useful information to management and other interested users for decision-making.

The users of accounting information are divided into two broad groups: internal users and external users.

Long-term lenders need information about the creditworthiness of the company and its ability to repay loans and pay interest.

External users are groups outside the business entity who use accounting information to make decisions about the business entity.

Management needs accounting information for several purposes:

- Planning business operations
- Controlling activities
- Decision-making
- Assessing profitability
- Cost of sales analysis
- Budgeting
- Taking pricing decisions
- Taking capital expenditure decisions
- Comparing performance with past results and with other businesses
- Evaluating the impact of decisions and actions

Any three examples of revenues are commission, interest and dividends. Other examples from the chapter include rent received and royalties.