1.2 ACCOUNTING

1.1 Accounting

Accounting is one of the key functions for almost any business; it may be handled by a bookkeeper and accountant at small firms or by sizable finance departments with dozens of employees at larger companies.  

There are many definitions of accounting including the following: 

Definitions: Accounting 

The systematic and comprehensive recording of financial transactions pertaining to a business and the process of summarizing, analyzing and reporting these transactions. A systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information. 

Accounting is a term that covers both of the following:

• Bookkeeping: maintaining a system of accounting records that captures and summarizes business transactions and other items of a financial nature; and
• Financial reporting: preparing financial statements which allow users of those statements to understand the financial position and the financial performance of an entity.

Accounting information is needed by business of all types and sizes including, sole traders, partnerships and companies. It is also needed by entities that exist for a reason other than making a profit. Such not-for-profit entities include charities, societies and government departments. This text will explain bookkeeping for a business but remember that much of what is covered would also be relevant to other types of entity. 

Accounting information is provided for use both: 

• Internally, providing management with information needed to run the entity (known as management accounting); and
• Externally, providing information for other interested parties to understand the position and performance of an entity. For example, a company produces accounting information for its shareholders in the form of financial statements, and financial statements are also used by tax authorities, investors, trade union representatives and others. (This is known as financial accounting).