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Accounting is an information system designed to identify, record, and reflect economic activities and events about an enterprise with monetary unit as its main criterion.
Identifying means to distinguish which activities are related to a firm’s objectives. Only those relevant economic activities need to be recorded, classified, and summarized by the accountant. Recording means to keep a systematic, chronological dairy of economic activities, and events measured in dollars. Reflecting means to provide timely and accurate information about a firm’s financial condition and operating performance to its external and internal users by means of financial report s. A vital element in reflection is the accountant’s ability to analyze and interpret reported information, and it involves the application of ratios, percentages, graphs, and charts to emphasize significant trends of economic activities and their relationships.
It is worth noting that accounting involves bookkeeping , while bookkeeping only involves the recording of economic activities as it is just one part of the whole accounting process. Accounting is also an information system which provides the required information to shareholders, creditors, and other stakeholders of the enterprise. The primary objective of accounting is to provide useful information to decision makers.
The basic objective of accounting is to provide useful information for decision making. Information to be useful should be trustworthy. Thus, the effectiveness of financial reporting depends on sound ethical behaviors . Ethic is an ideological standard by which one’s conduct is judged to be right or wrong, honest or dishonest, fair or unfair.
When analyzing an economic activity involving ethics, it is helpful for accountants to follow the following three steps. First, accountants should recognize the ethical situation and its related ethical issues.That means to use accountant’s personal moral standards to identify the ethical situation and its related ethical issues. Some professional organizations also provide written codes of ethics as guidance in these situations. Both the Accounting Law of the People’s Republic of China and the Accounting standards specify contents and requirements of accounting professional ethics. Second, accountants need to identify and analyze the principal elements in the ethical situation so as to figure out who or which group may be harmed by or benefited from this situation, and which party should assume its responsibility and obligation.Third and the last, accountants need to design various alternatives, and assess the impact of each alternative to its stakeholders. This step requires that accountants should select the most ethical alternative after considering all the possible results. Sometimes there will be only one solution, but sometimes there will be more than one. In such situation, it’s necessary to select the best alternative through evaluation and comparison.
Accounting function is the intrinsic role of accounting in an enterprise’s operation and management.A correct understanding of accounting function is of great significance to the putting forward of accounting tasks, the determination of responsibilities and authorities of accounting personnel, as well as the full playing of accounting roles.
Calculation function is one of the basic functions of accounting. It runs through the whole process of economic activities. Under this function, by taking money as the measurement unit, it applies certain methods or procedures to record economic activities and carries out necessary calculation, sorting,processing, and summarizing. It aims to turn data into a series of information that could reflect the accounting entity, and to summarize the producing and operating activities and their achievements.
Supervision function is also known as control function. It aims to examine the reliability, validity, and rationality of economic businesses of a specific accounting entity when accounting personnel conduct calculation. Compared to calculation function, it is not only a basic function of accounting, but an important component of the whole economic regulatory system.
In addition, prediction, decision making as well as analysis are all essential components of accounting function.
There are two broad types of financial information users : internal users and external users .
Internal users of accounting information are the users who are inside an enterprise and plan, organize,manage its business, such as board of directors , Chief Executive Officer (CEO) , Chief Financial Officer (CFO) , and so on. By reading and analyzing the detailed information involved with the company’s financial position and financial performance, these internal users could make their own decisions about operating, financing, and investing.
External users of accounting information are the users who are outside the enterprise, such as shareholders (investors), creditors (lenders), tax offices , external (independent) auditors , labor unions ,and so on. Among them, the first two are the most common types of external users. Shareholders (investors) refer to those who engage in investment activities in the capital market. As the owner of one company,shareholders rely on accounting information to decide whether to buy in, hold on, or sell out shares or stocks of the corporation. Creditors (lenders) are individuals or organizations that the enterprise owes money or other resources. Creditors need to use accounting information to evaluate risks of granting business credit or lending money to the enterprise and to decide whether to provide purchase on credit or lend money to it.
Different external users need different kinds of information. For example, tax offices which have the right to levy need accounting information about whether the company have paid taxes according to the law and how much taxes it should pay, while potential investors follow accounting information of a company’s profitability and sustainability.
The accounting profession can be divided into three broad categories: public accounting , private accounting , and accounting for government and nonprofit organizations .
Public accounting provides accounting services to the public on a compensable foundation base. In the field of public accounting, the accountant can provide service either as an individual or as a member of accounting firms. Most of the accountants working in public accounting firms are qualified as a Certified Public Accountant (CPA) . Thus, public accounting firms are also called CPA firms, and they could provide services like auditing, tax agency, management advisory and authentication.
Private accounting is one of the core functions of business. According to the subject and purpose of service, modern accounting can be divided into two main branches: financial accounting and management accounting . Financial accounting is concerned with providing accounting information to shareholders, creditors, and other information users. Based on generally accepted accounting principles (GAAP) , it measures and records business transactions and prepares financial statements to convey information. By measuring, analyzing, and reporting financial and non-financial information, management accounting could help managers choose, communicate, and implement appropriate strategies, and then help the company fulfill its development targets.
Accounting for government and nonprofit organizations mainly provides accounting service to government and nonprofit organizations. It has two major activities. One is to check and supervise the implementation of budget for each level of the government and all the non-profit organizations. Another is to identify, measure, and report all the financial incomes and expenditures of government and nonprofit organizations as well as the corresponding result. Accordingly, accounting for government and nonprofit organizations is usually engaged in activities like budget management, administration management, social service, and etc..