The Purpose of Accounting

The Purpose of Accounting

The purpose of accounting is keeping track of transactions and recording revenue and expenses, which are important business processes often assigned to an accounting department or a financial manager. Accounting is a business discipline that allows companies to record analyze and retrieve critical financial information that can be used to determine a company's financial status and provide reports and insights needed to make sound financial decisions.

The primary purpose of accounting is to identify and record all activities that influence the organization financially. All activities, including purchases, sales, the acquisition of capital and interest earned from investments, can be classified in monetary terms and posted to a specified account as an accounting record. These transactions typically are recorded in ledgers and journals and are part of the process known as the accounting cycle. The two main branches of accounting are managerial accounting and financial accounting. Managerial accounting refers to the processes and procedures implemented for internal decision-making and reporting within an organization. Financial accounting refers to the fundamental guidelines, policies, procedures and regulations mandated by the Generally Accepted Accounting Principles (GAAP), which has been established by the Financial Accounting Standards Board (FASB).

Four basic financial statements are used in accounting to report compiled financial data to its users in an efficient and effective manner. Balance sheets, income statements, statements of cash flow and statements of retained earnings comprise these four basic documents. Balance sheets depict the current financial circumstances of a business, income statements report their costs and revenues, statements of cash flows describe the changes in cash and cash-equivalents, and statements of retained earnings report the changes in equity, all over a period a time. While these statements look at different aspects of the company, they are interrelated and dependent on each other, as information from one is needed to prepare the others. The key to understanding accounts is to have a good grasp of what the basic statements are there to do: how they are prepared, what they tell you, and what they do not.

Companies create and distribute financial statements each period. These basic financial statements include the income statement, the balance sheet, the statement of cash flows and the statement of stockholders equity. Managers, investors, creditors and employees use these financial statements to consider the financial health of the company and make future decisions. Each financial statement