Financial Accounting (Lumen)

Definition of Accounting

We understand, from the prior video, that accounting is “the language of business”.

The American Accounting Association defines accounting as:

the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information. This information is primarily financial—stated in money terms. Accounting, then, is a measurement and communication process used to report on the activities of profit-seeking business organizations. As a measurement and communication process for business, accounting supplies information that permits informed judgments and decisions by users of the data.

Internal & External Users

Users of accounting information are separated into two groups, internal and external. Internal users are the people within a business organization who use accounting information. External users are people outside the business entity that use accounting information. Accounting information is valuable because decision makers both internally and externally can use it to evaluate the financial consequences of various alternatives. Accountants reduce uncertainty by using professional judgment to quantify the future financial impact of taking action or delaying action. Although accounting information plays a significant role in reducing uncertainty within an organization, it also provides financial data for persons outside the company.

Bookkeeping vs. Accounting

Accounting is often confused with bookkeeping. Bookkeeping is a mechanical process that records the routine economic activities of a business. Accounting includes bookkeeping but goes well beyond it in scope. Accountants analyze and interpret financial information, prepare financial statements, conduct audits, design accounting systems, prepare special business and financial studies, prepare forecasts and budgets, and provide tax services.

Why is it Important to Study Accounting?

You probably will find that of all the business knowledge you have acquired or will learn, the study of accounting will be the most useful. Your financial and economic decisions as a student and consumer involve accounting information. When you file income tax returns, accounting information helps determine your taxes payable. Watch this video to get a better idea of why it is important to study accounting.