William A Paton, Professor of Accounting at the University of Michigan, states that accounting has one basic function, namely facilitating the administration of economic activity, which can be divided into two closely related phases:
1) measuring and arraying economic data; and
2) communicating the results of this process to interested parties.
For instance, a company’s accountants periodically measure the profit and loss for a month, a quarter or a fiscal year and publish these results in a statement of profit and loss which is also known as an income statement. These statements include two big types of elements: accounts receivable (what’s owed to the company) and accounts payable (what the company owes). At the higher levels of accounting and in the organization, it can also contain other sophisticated things like retained earnings and accelerated depreciation.
To a great extent, accounting also relates to basic bookkeeping, which is defined as the process that records every transaction; every bill paid, every dime owed, every dollar and cent spent and accumulated.
But usually, the owners of the company, which can be individual owners or millions of shareholders, are most concerned with the totals of these transactions, contained in the financial statement. The aim of the financial statement is to summarize a company’s assets. A value of an asset equals the amount of money paid for it when it was first acquired. The financial statement also includes the sources of the assets. Assets may be of different form, for example, loans that have to be paid back. Another type of business asset is profits.
Bookkeeping may be performed in the way called double-entry bookkeeping, where the liabilities are also summarized. It is done by companies to show higher amounts of assets in order to offset the liabilities and show a profit. Accounting itself represents the management of these two elements.
Of course, nowadays there is a definite system for accounting. It is not the case that every company or individual use their own accounting systems but keep to some approved one; otherwise this could lead us to chaos!
RSS FEED