Another definition of American Institute of Certified Public Accountants (AICPA) is that “Accounting is 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.”
Accounting entails recording, classifying and summarizing of business transactions. It is a process of identification, measurement and communication of economic information involving four interconnected phases. They are outlined herein:
At the outset, the first phase is meant to record the economic events or transactions -depending upon their occurrences, chronologically in the books of accounts -called journal. This process is known as journalizing. Next comes the phase of ledger-posting: It is the process by which all the transactions are synthesized account-wise so that the accumulated balance of each of those accounts can be determined. The process of ledger posting is vitally important, as it helps in ascertaining the net effect of various transactions during a given period. The subsequent stage is preparing the trial balance which involves the arrangement of all ledger accounts having been aggregated into debit and credit balances. This activity enables to check and confirm whether the total of debits is equal to that of credits. Finally, comes the phase of preparing financial statements. This phase is meant for finalization of accounts by measuring profit & loss account and preparing Balance Sheet- at the end of accounting period.
There are many different users of accounting information and the users may be inside or outside the organization. Accounting information is economic information, as it relates to financial or economic activities of a business organization. There are so many people using the accounting information for so many diverse purposes, thus, the purpose of financial statements is to cater for the needs of the users that could lead them to make better financial decisions. The users may be classified into Internal and external users.
Internal users or Primary users of accounting information include:
- Management- Accounting information is of great assistance to management for planning, controlling and decision making process. Also, management needs the accounting information to evaluate the performance of the organization and position, so that the necessary measures may be taken to bring improvements in terms of business results. Besides, accounting information is useful to help mangers to do their jobs better.
- Employees - Employees use the accounting information to find out the financial health, amount of sales
- Owners – Owners use the accounting information for analyzing the viability and profitability of their investments. Accounting information enables the owners to assess the ability of the business organization to pay dividends. It also leads them to determine any future course of action.
External users or Secondary users of accounting information include:
- Creditors – Creditors are interested in accounting information, because it enables them to determine the credit worthiness of the business. The credit terms and standards are set on the basis of the financial health of a business, so, it helps them to analyze by using the accurate information accordingly. Creditors include suppliers and lenders of finance, such as banks. Trade creditor are generally interested in the accounting information for a short period of time than lenders.
- Investors – They need the information, because they are concerned with the risk inherent in investing and the returns. Since it is important to assess the feasibility of making investments in the company, they need to analyze before they provide any financial resources to the company.
- Customers – Customers have interest in the accounting information for assessing the financial position of a business, especially, when they have a long term involvement with, as it enables to maintain a steady source of business.
- Regulatory Authorities – The accounting information is needed for them to ensure that it is in accordance with the rules and regulations and that it protects the interests of the stake holders who rely on such information.
K. A. Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Software Developer
BBA, MBA-Finance, MPhil-Financial Management, (PhD-Management)
Module 1 - Leadership and Management ILM – UK
Individual Member of Institute of Management Consultants of India