The concept of accounting

Accounting is an information system that identifies, records, analyzes, interprets and communicates the economic data of a financial company. Accounting consists of three basic activities – identifying, recording and communicating an organization’s economic events to interested users. Let’s take a closer look at these three activities.

Identifying economic events:

Many events happen every day in a company. Some of them affect the company’s financial condition while others do not. Events affecting the financial position of a company i.e. assets = liabilities + equity are known as economic events and are intended 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 include PepsiCo selling snack chips, AT&T providing phone service, and Ford Motors Company paying wages. Examples of non-economic events from the same companies might include the appointment of a new manager by PepsiCo and the departure of a trusted AT&T employee.

Recording economic events:

Once a company like PepsiCo identifies economic events, it records those events to provide a history of its financial activities. Keeping a record consists of keeping a systematic, chronological journal of events, measured in dollars and cents. The record is kept through a process known as the double-entry bookkeeping system. The system consists of recording, summarizing, checking the mathematical correctness and preparing the balance sheet.

Communication of consolidated financial data:

Finally, PepsiCo communicates the collected information to interested users via accounting reports. The most common of these reports are referred to as financial reports. Parties interested in company financial information can be divided into three main categories. The interested parties are internal, external and government. In order to make the reported financial information meaningful, PepsiCo reports the recorded data in a standardized manner. It collects information resulting from similar transactions. For example, PepsiCo accumulates all sales transactions over a period of time and reports the data as one amount in the company’s financial statements, reporting that data as aggregated. By presenting the collected data in an aggregated way, the accounting process simplifies a large number of transactions and makes a number of activities understandable and meaningful.

A key element in communicating economic events is the accountant’s ability to analyze and interpret the information being reported. Analysis involves using ratios, percentages, graphs and charts to highlight key financial trends and relationships. The interpretation includes an explanation of the use, meaning and limitations of the reported data.