Accounting is an information system that identifies, records, analyzes interprets, and communicates the economic data of a financial entity. Accounting consists of three basic activities – it identifies, records, and communicates the economic events of an organization to interested users. Let’s take a closer look at these three activities.
Identifying Economic Events:
Many events are happening each day in a business. Some of them affect the financial position of the business whereas, some don’t. Events affecting the financial position of a business i.e. Assets=Liability+ Owner’s Equity, are called Economic events and are supposed to be recorded in the accounting system. To identify economic events; a company selects the economic events relevant to its business. Examples of economic events are the sale of snack chips by PepsiCo, Providing of telephone services by AT&T, and the payment of wages by Ford Motors Company. Examples of non-economic events of the same companies might be appointing a new manager by PepsiCo and the departure of a trusted employee from AT&T.
Recording Economic Events:
Once a company like PepsiCo identifies economic events, it records those events in order to provide a history of its financial activities. Recording consists of keeping a systematic, chronological diary of events, measured in dollars and cents. Recording comes through a process called a double entry accounting system. The system consists of recording, summarizing, checking mathematical accuracy and preparing statements of financial position.
Communicating Consolidate Financial Data:
Finally, PepsiCo communicates the collected information to interested users by means of accounting reports. The most common of these reports are called Financial Statements. Parties interested into a business’s financial information can be classified into three main categories. The interested parties are Internal, External and Government. To make the reported financial information meaningful, PepsiCo reports the recorded data in a standardized way. It accumulates information resulting from similar transactions. For example, PepsiCo accumulates all sales transactions over a certain period of time and reports the data as one amount in the company’s financial statements such data are said to be reported in the aggregate. By presenting the recorded data in the aggregate, the accounting process simplifies a multitude of transactions and makes a series of activities understandable and meaningful.
A vital element in communicating economic events is the accountant’s ability to analyze and interpret the reported information. Analyses involve use of ratios, percentages, graphs, and charts to highlight, significant financial trends and relationships. Interpretation involves explaining the uses, meaning and limitations of reported data.
