Accounting Is the Financial Information System

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Accounting is the financial information system that provides these insights. In short, to understand your organization, you have to know the numbers. Accounting consists of three basic activities—it identifies, records, and communicates the economic events of an organization to interested users.

You cannot earn a living, spend money, buy on credit, make
an investment, or pay taxes without receiving, using, or dispensing financial information. Good decision making depends on good information.

A vital element in communicating economic events is the accountant’s ability to analyze and interpret the reported information. Analysis involves use of ratios, percentages, graphs, and charts to highlight significant financial trends and relationships. Interpretation involves explaining the uses, meaning, and limitations of reported data.

In total, accounting involves the
entire process of identifying, recording, and communicating economic events.2

Investors
(owners) use accounting information to make decisions to buy, hold, or sell stock. Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money.

The retained earnings (earned capital) section of the balance sheet is determined by three items: revenues, expenses, and dividends.

An income statement presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time. 2. A retained earnings statement summarizes the changes in retained earnings for a specific period of time.

3. A balance sheet reports the assets, liabilities, and stockholders’ equity of a company at a specific date.
4. A statement of cash flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time. Each statement provides relevant financial data for internal and external users

The income statement reports the success or profitability of the company’s operations...
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