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Introduction to accounting
It is not easy to provide a concise definition of accounting since the word has a broad application within businesses and applications.
The American Accounting Association defines accounting as follows:
"the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information!.
Thisdefinition is a good place to start. Let's look at the key words in the above definition:
- It suggests that accounting is about providing information to others. Accounting information is economic information - it relates to the financial or economic activities of the business or organization.
- Accounting information needs to be identified and measured. This is done by way of a "set of accounts", basedon a system of accounting known as double-entry bookkeeping. The accounting system identifies and records "accounting transactions".
- The "measurement" of accounting information is not a straight-forward process. it involves making judgments about the value of assets owned by a business or liabilities owed by a business. it is also about accurately measuring how much profit or loss has beenmade by a business in a particular period. As we will see, the measurement of accounting information often requires subjective judgment to come to a conclusion
- The definition identifies the need for accounting information to be communicated. The way in which this communication is achieved may vary. There are several forms of accounting communication (e.g. annual report and accounts, managementaccounting reports) each of which serve a slightly different purpose. The communication need is about understanding who needs the accounting information, and what they need to know!
Accounting information is communicated using "financial statements"
What is the purpose of financial statements?
There are two main purposes of financial statements:
(1) To report on the financial position of anentity (e.g. a business, an organization);
(2) To show how the entity has performed (financially) over a particularly period of time (an "accounting period").
The most common measurement of "performance" is profit.
It is important to understand that financial statements can be historical or relate to the future.
Accountability
Accounting is about ACCOUNTABILTY
Most organizations are externallyaccountable in some way for their actions and activities. They will produce reports on their activities that will reflect their objectives and the people to whom they are accountable.
The table below provides examples of different types of organizations and how accountability is linked to their differing organizational objectives:
Organization | Objectives | Accountable to (examples) |Private or public company
(e.g. BP, Tesco) | - Making of profit
- Creation of wealth | - Shareholders
- Other stakeholders (e.g. employees, customers, suppliers) |
Charities
(e.g. Save the Children) | - Achievement of charitable aims
- Maximise spending on activities | - Charity commissioners
- Donors |
Local Authorities
(e.g. Leeds City Council) | - Provision of local services
- Optimalallocation of spending budget | - Local electorate
- Government departments |
Public services (e.g. transport, health)
(e.g. National Health Service, Prison Service) | - Provision of public service (often required by law)
- High quality and reliability of services | - Government ministers
- Consumers |
Quasi-governmental agencies
(e.g. Data Protection Registrar, Scottish Arts Council)| - Regulation or instigation of some public action
- Coordination of public sector investments | - Government ministers
- Consumers |
All of the above organizations have a significant roles to play in society and have multiple stakeholders to whom they are accountable.
All require systems of financial management to enable them to produce accounting information.

How accounting...