What is the purpose of accounting? Important things to know

When we talk about the purpose of accounting, it is more than just giving a definition of accounting. We can define accounting as the process of identifying, measuring and communicating economic information to provide owners of business and others with useful information to help them assess performance and make informed decisions.

The purpose of accounting tells us exactly why users want to know this useful information to assess performance and make informed decisions. Here are 5 important things to know when explaining the purpose of accounting.

5 Important things to know about the purpose of accounting

Profitability

Owners of businesses and users of accounting information want to know if the business is profitable. Making a profit is the main reason for starting a business.

Liquidity

A liquid business means that cash is readily available for paying off expenses and short-term debts. If the business has plenty cash and cash equivalents available, then it is successful.

Decision-making

Users of accounting information can tell if managers of the business are making sound decisions. A business that is profitable and liquid means that good decisions are being made.

Control

When explaining the purpose of accounting, remember that the records help to control the finances of the business. This means that users of accounting information can detect and prevent internal errors, fraud, theft, mismanagement, damages and losses.

Legal requirements

Finally, students must know that when talking about the purpose of accounting, it is lawful. It is the legal requirements of businesses to maintain an accurate financial record of their transactions and share the reports with the shareholders, tax authorities and regulators.

See also:

ALICE: Assets, Liabilities, Income, Capital, Expenses

Assets: Owned fixed and liquid items with a debit balance

Liabilities: Owed long and short-term items with a credit balance

Income: Earned, unearned and contributed money

Capital: Invested assets and the liquidity of a business

Expenses: Spending that’s direct, indirect, operating and non-operating

Debit and Credit: Simple view of in and out

Increase and decrease of ALICE accounts

Accruals: How to record owed expenses and revenues in the Accounting Cycle

Accounting Cycle: Complete basic accounting in 8 steps

Journals: Complete 7 Day Books with 4 types of transactions

Ledger accounts: Simple breakdown of Types, Format, Double Entry, Balance

Trial Balance: 6 important things to know

Income Statement: 6 key points for reporting profitability

Balance Sheet: 10 key parts of the statement of financial position

Cash Book: How to record cash, bank and discounts

7 Key financial ratios students should know in basic accounting