Accounting System

Accounting, systematic development, and analysis of information about the economic affairs of an organization. This information may be used in a number of ways: by a firm’s managers to help them plan and control ongoing operations; by owners and legislative or regulatory bodies to help them appraise the organization’s performance and make decisions as to its future; by owners, lenders, suppliers, employees, and others to help them decide how much time or money to devote to the company; by governmental bodies to determine what taxes a business must pay; and occasionally by customers to determine the price to be paid when contracts call for cost-based payments.

Accounting provides information for all these purposes through the maintenance of data, the analysis and interpretation of these data, and the preparation of various kinds of reports. Most accounting information is historical—that is, the accountant observes all activities that the organization undertakes, records their effects, and prepares reports summarizing what has been recorded; the rest consists of forecasts and plans for current and future periods.

Accounting information can be developed for any kind of organization, not just for privately-owned, profit-seeking businesses. One branch of accounting deals with the economic operations of entire countries. The remainder of this article, however, will be devoted primarily to business accounting.

The objectives and characteristics of financial reporting
The overarching objective of financial reporting, which includes the production and dissemination of financial information about the company in the form of financial statements, is to provide useful information to investors, creditors, and other interested parties. Ideally, accounting information provides company shareholders and other stakeholders (e.g., employees, communities, customers, and suppliers) with information that aids in the prediction of the amounts, timing, and uncertainty of future cash flows. In addition, financial statements disclose details concerning economic resources and the claims to those resources.

In recent years, there has been a growing demand on the part of stakeholders for information concerning the social impacts of corporate decision-making. Increasingly, companies are including additional information about environmental impacts and risks, employees, community involvement, philanthropic activities, and consumer safety. Much of the reporting of such information is voluntary, especially in the United States.

In addition, quantitative data are now supplemented with precise verbal descriptions of business goals and activities. In the United States, for example, publicly traded companies are required to furnish a document commonly identified as “management’s discussion and analysis” as part of the annual report to shareholders. This document summarizes the historical performance and includes forward-looking information.

 

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