The concept of accounting

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

Identification of economic events:

Many events are happening every day in a business. Some of them are affecting the financial position of the company, while others are not. Events that affect the financial position of a company, i.e. Assets = Liabilities + 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 facts relevant to its business. Examples of economic events are the sale of PepsiCo potato chips, the provision of telephone service by AT&T, and the payment of wages by Ford Motors Company. Examples of non-economic events from the same companies might be the appointment of a new manager by PepsiCo and the departure of a trusted employee from AT&T.

Record of economic events:

Once a company like PepsiCo identifies economic events, it records them to provide a history of its financial activities. Recording consists of keeping a chronological and systematic diary of events, measured in dollars and cents. The record comes through a process called a double-entry bookkeeping system. The system consists of recording, summarizing, verifying mathematical accuracy, and preparing the statement of financial position.

Communication of consolidated financial data:

Finally, PepsiCo communicates the collected information to interested users through accounting reports. The most common of these reports are called financial statements. The parties interested in the financial information of companies can be classified into three main categories. The stakeholders are Internal, External and Government. In order for reported financial information to be meaningful, PepsiCo reports recorded data in a standardized manner. Accumulates information resulting from similar transactions. For example, PepsiCo accumulates all sales transactions over a certain period of time and reports the data as a single amount in the company’s financial statements, such data is said to be reported in the aggregate. By presenting recorded data together, the accounting process simplifies a multitude of transactions and makes a number of activities understandable and meaningful.

A vital element in the communication of economic events is the accountant’s ability to analyze and interpret the information reported. Analyzes involve the 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.