Accounting is the process used by individuals and businesses to track and report information. All transactions are recorded and posted into different accounts using a double-entry system of debits and credits. The information is stored, summarized and used for many different purposes. The primary objectives of accounting are all interrelated and all have an emphasis on recording and reporting accurate information.
The accounting process provides important information to several different groups of people. Managers and owners of a business use this information to make decisions for the future. Investors and creditors use this information to make decisions about investing in a company or lending money to a company. Providing information is one of the primary objectives of accounting.
Generally Accepted Accounting Principles (GAAP) is a set of guidelines businesses are required to follow. One objective of accounting is following these principles in order to provide accurate, timely information that is reported consistently by all companies. These standards allow investors and other stakeholders the ability to review financial statements knowing that the companies have all followed these standard principles.
All business transactions are recorded and stored in order to create financial statements at the end of a period. These statements are vital for all stakeholders in determining the financial position of a company. Companies produce four main financial statements -- the Income Statement, Balance Sheet, Statement of Owner’s Equity and the Statement of Cash Flows. Each statement is aimed at providing details about certain aspects of a business’s financial activity.
Another objective of accounting is providing an audit trail. This objective is a focus for a company’s internal control system. An audit trail allows auditors, managers and other stakeholders to review all accounting records in a systematic way. It allows them to easily trace transactions and helps avoid fraud within a company.
Accounting is used and analyzed internally for strategic planning purposes. Managers and owners review accounting records and financial statements to determine where the company is heading. Managers make decisions based on the provided information. These decisions include making changes to activities that are not working, increasing or decreasing production and calculating how well the company’s cash is flowing.