Definition of Accounting, Purpose, and Users
Accounting Standards Council – Accounting is a service activity and its function is to provide quantitative information primarily financial in nature about economic entities intended to be useful in making economic decisions.
American Institute of Public Accountants – 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 a financial character, and interpreting the results thereof.
Why Need Accounting
Accounting provides you with the information needed to answer these questions:
- Are you losing or making money from your business?
- How much is your business worth?
- Should you expand, diversify, or sell your business already?
- How much is owed by you or how much you owe?
- Where did your money go?
- What can you do to improve your profits?
Users of Accounting Information
a. Investors/Owners – provide funds to the business. They want to know how their capital is employed and its corresponding return.
b. Management – is interested in how the business performs and whether it is profitable or not. The accounting information is the eyes and ears of the management and is the basis for appropriate and timely decision-making.
c. Creditors – provide loans to the business and they are interested in the financial soundness of the business before granting or renewing a loan. Income statements and balance sheets are needed to understand the financials of the business.
d. Employees – are interested in whether the company is able to provide them with their regular salaries, bonuses, and better working conditions. This depends on the profitability and financial position of the business.
e. Government – they keep an eye on the financial statements and returns to know the earnings of the business for the purpose of taxation.
f. Customers – want to understand if your business is profitable or not and if you can continue to provide their needed services and operate as a going concern.