The purpose of accounting is to provide information to different users. The users utilize the information in making economic decisions.
Accounting is the language of business; a means of communicating information about an economic entity to different users for decision-making.
According to the American Institute of Certified Public Accountants (AICPA):
Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, in making reasoned choices among alternative courses of action.
Accounting Information
Here's a list of the different types of information provided by accounting reports. These things will be clearer when you get to the tutorials on Financial Statements. For now, it is sufficient (and good) to know what information we are talking about.
Results of operations. This pertains to the profit generated by the company for a certain span of time (for a year, for a quarter, for a month, etc.). This is measured by deducting all expenses from all income. The resulting amount is called net income.
Financial position. How much resources does the entity currently have? How much does the entity owe third parties? How much is left for the owners after we pay all obligations using our resources? The first question refers to the entity's total assets; the second to liabilities, and the third to capital.
Solvency and liquidity. Solvency refers to the entity's ability to pay obligations when they become due. Liquidity pertains to its ability to meet short-term obligations.
Cash flows. The financial statements also show the inflows and outflows of cash in the different activities of the business (operating, investing, and financing activities).
Other information. The financial statements provide qualitative, quantitative, andfinancial information. One of the characteristics of the financial statements isrelevance. Any information that could affect the decisions of users should be included in the financial reports.
