What is accounting

Some people think of accounting as a highly technical field which can be understood only by professional accountants. Actually, nearly everyone practices accounting in one form or another on an almost daily basis. Accounting is the art of measuring, describing, and in­terpreting economic activity. Whether you are preparing a household budget, balancing your checkbook, preparing your income tax return, or running General Motors, you are working with accounting concepts and accounting information.

Accounting has often been called the «language of business». Such terms as assets, liabilities, revenue, expense, cash flow, inventory turnover, and earnings per share are but a few examples of technical accounting terms widely used in the business community. Every inves­tor, manager, and business decision maker needs a clear understanding of accounting terms and concepts.

The accounting function is vital to every unit of our society. An individual must account for his or her income, and must file income tax returns. Often an individual must supply personal accounting informa­tion in order to buy a car or home, to qualify for a college scholarship, to secure a credit card, or to obtain a bank loan. Large corporations are accountable to their stockholders, to governmental agencies, and to the public. Therefore, some knowledge of accounting is needed by all citizens if they are to act intelligently in meeting the challenges of our society.

The purpose of accounting is to provide financial information about an economic entity to decision makers. Business executives and manag­ers need the financial information provided by an accounting system to help them plan and control the activities of the business. For example, management needs answers to such questions as the profitability of each department of the business, the adequacy of the company's cash position, and the trend of earnings. Thus, accounting is the connecting link between decision makers and business operations.

Financial information about the business is also needed by out­siders. These outsiders include owners, bankers, other creditors, potential investors, labour unions, the government, and the public, because all these groups have supplied money to the business or have some other interest in the business.