Please can someone give me, as detailed as they can, an explanation of what the purpose of accounting is?
Thanks! x
Thanks guys, you have been great!
Ha ha, thanks knight-wing, but ive heard you guys charge more money than ive got lol!
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There is a long answer and a short answer to your question.
Short answer: The purpose of Accounting is to measure, record and report financial information that is useful for decision-making.
Long answer: Each of the three functions listed above can become complex, depending on the nature of the business.
— MEASURE
Transactions with concrete dollar amounts are easy to measure, but conceptual dollar amounts (e.g., depreciation, reserve accounts, write-offs, and so on) are subjective and require the experience of an accountant to apply the most appropriate method to the situation.
– RECORD
The debits and credits of any transaction should be keyed/entered into the correct account(s). Collecting cash should increase the cash account whereas paying an invoice should decrease the cash account. More complex transactions that affect accounts involving inventory, financial instruments (stocks, bonds, notes, etc.), or accounting estimates demand compentant accounting personnel.
– REPORT
Various government agencies (e.g., SEC, IRS) periodically require for businesses to provide financial information. Likewise, stockholders are entitled to know the financial position of their company. The standard reports are the Balance Sheet, Income Statement, Statement of Cash Flows, and Statement of Retained Earnings. Accountants are trained to provide these reports.
The most important part of the definition is that the information is "useful for decision-making." The decision maker could be management, stockholders, debtors, creditors, etc.
For a more detailed explanation…I recommend an Accounting degree.
You can do a whole degree course on this but basically you keep financial records for a business so you will know things like; Who owes you money; who do you owe money to; are you making a profit or a loss? You also need information to fill in tax forms etc.
So you know whether your business or company is making any money. And to keep the tax department happy with reports etc.
Accounting is two things. The first is a detailed record of all your assets, liquid (like money) and fixed (like your car), so you know how much you have and how mmuch you are worth.
The second thing is so, that government types (who interfere in everything) can give your company an audit and make sure you haven’t been stealing from the company and the like. This won’t affect you if you talking about your private accounts.
Besides the good reasons above there is also
To ensure you have a complete financial position of the company on a day-to-day, month-by-month basis – for instance a large balance in the bank doesn’t mean that is profit – you may have tax to pay.
To check that no fraud is being committed by employees.
To ascertain the weaknesses and strengths of the company (are you paying to too much for item x?)
To help forecasting likely future scenarios.
To ensure there is enough money in the business to pay yourself.
Bit like the same reason you have all the information in front of you on your car to tell you how much petrol you have left, what speed you are doing etc.
accounting is used to reflect the true financial performance using an income and expenditure layout called a profit and loss.
accounting is also used to provide a snap shot of whether the business is financially viable, ie solvent. this is done by preparing a balance sheet.
plus the tax man wants his money so accounting can be used to ensure that from a tax mans point of view the correct amount of tax is being paid and from the businesses point of view, that as little tax is paid as possible.
the purpose of the accounting :
1- determine the financial position of the company
2- determine the profitability of the company
3-determine the liquidity of the company