Decision Making and the Role of Accounting

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CHAPTER 1. DECISION MAKING AND THE ROLE OF ACCOUNTING.

ACCOUNTING: The process of identifying, measuring, recording and communicating economic information to permit informed judgment and economic decisions by users of the information.

THE NATURE OF ACCOUNTING: Accounting is a services activity (to business, government, charities, clubs and families). Its function is to provide and interpret financial information that is intended to be useful in making economic decisions.

IDENTIFICATION: involves observing economic events and determining which of those events represent economic activities relevant to a particular business. Transactions: are referred to by accountants as an economic event of an entity. Transactions constitute the inputs of the accounting information system. There are two types, external and internal. External transactions (often called exchange transaction): are those that involve economic events between one entity and another entity. E.g. purchasing goods from a supplier or borrowing money from a bank. Internal transaction: are those economic events that take place entirely within on entity. E.g., the depreciation of machinery used in the production of goods must be accounted for. MEASUREMENT: must take place before the effect of transaction can be recorded. Must be expressed in common measuring units. RECORDING: provides a history of the economic activity of a particular entity. Effects the business after they have been identified and measured. Recorded data would be limited as it must be summarized and classified to be useful in making decisions. COMMUNICATION: the final part of the accounting process. Involves preparing and distributing accounting reports to potential users of accounting information.

USERS OF ACCOUNTING INFORMATION
First objectives of accounting is to provide info in reports which can be used by internal and external decision makers .INTERNAL USERS: mangers (internal decision makers) must have financial data...
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