The Purpose of Accounting

Accounting is a scheme of recording, analyzing, and summarizing transactions of a business.



o The transactions are recorded in "books of prime entry"
o The transactions are than analyzed and posted to the ledger
o Finally the transactions are summarized in the financial statements



The need of Accounts



If business runs efficiently, why it have to go through all the bother of accounting procedures in order to design financial information?



A business should gain information about its activities because there are various groups of people who want or need to know that information. This sounds rather vague, to originate it clearer, we should witness more closely at the classes of people who might need information about a business. We need also to consider about what information in particular is of interest to the members of each class.



Users of financial statements and accounting information



The people who might be alive to in financial information about a ample public company may be classified as follows,



o Managers of the company.
o Shareholders of company.
o Trade contacts.
o Providers of finance to the company.
o The Inland Revenue.
o Employees of the company.
o Financial analysts and advisers.
o Government and their agencies.
o The public.



Accounting information is organized into financial statements to satisfy the information needs of these different groups,



Not-commercial undertakings



It is not only businesses that need to prepare accounts, Charities and Clubs also prepare financial statements every year. Accounts also need to be prepared for public sector organization.



The Main Accounting Statements



Transactions are summarized in the financial statements. The two main financial statements are the Balance sheet and the Profit and loss story. Both of the balance sheet and the profit and loss sage are summaries of accumulated data.



The balance sheet - is simply a list of all the assets owned and all the liabilities owned by a business as at a particular date. It shows the financial dwelling of the business at a particular moment.



A profit and loss epic - is a picture of income generated and expenditure incurred over a given period.
The period chosen will depend on the purpose for which the statement is produced, that time called finance year.