Basic Purpose of Accounting
The purpose of accounting is to properly present financial information that is to be used by interested parties in forming intelligent economic decisions about the success and usefulness of company operations. By presenting a financial snapshot of company operations, decision makers can determine, for instance, how profitable a single product is to how much publicly owned stock the company has outstanding.
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Facts
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Accounting is the art of describing, measuring and interpreting economic activity. Accounting is commonly known as the language of business. The accounting process involves working with industrywide accounting principles and concepts, also known as GAAP (generally accepted accounting principles). The basic purpose of accounting is to provide financial information to aid in decision making processes regarding operations, meet regulatory requirements and produce financial statements.
Function
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The goal of accounting is to keep track of cash inflows and outflows. It is used on an as-needed basis by transaction recorders (bookkeepers) and decision makers such as stockholders and managers. To achieve the basic purpose of accounting, computers, video displays, accounting software, financial statements and accounting journals may be used. The goal is to make budgets, projections, financial reports, highlight areas of profitability or loss and provide factual information about the entity's state of finances.
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Features
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Distinguishing functions of accounting include recording, classifying and summarizing transactions. Recording daily transactions in an accounting journal is the first function of the accounting system. This can be done daily, weekly or monthly. Then, in order to make the information useful, transactions must be classified into related account groups. This is where the chart of accounts comes in handy. Once the transactions are classified, they can be summarized by account. Summary figures appear in financial statements.
Significance
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It is important to understand the basic purpose of accounting since it exists at all levels of operation--from businesses to individual households. Accounting reveals information about a firm's financial worthiness. Every day, transactions occur and need to be handled properly in order to give a realistic financial picture. Maintaining proper financial records is a requirement of the IRS. A poor accounting and recordkeeping system has been the downfall of many businesses.
Benefits
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The benefits of a sound accounting system are significant: Bills will be paid on time, decreasing chances of late fees while also improving credit ratings; sales can be broken down per client, product and price to improve both productivity and profitability; taxes will be paid and filed in a timely fashion, thereby decreasing risks of audits, penalties and interest; expenses can be analyzed and investigated for any abnormalities; cash flow can be analyzed; and owners can receive up-to-date information on their equity account and stocks outstanding.
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