What is Accounting

Gabriel A. Listianto, Ph.D., Ak.

Undergraduate Accounting Progam. Sanata Dharma University.
What is Accounting

Accounting is the financial information system

that provides understanding what is happening
financially inside an organization.
In short, to understand an organization of any
type, you have to know the numbers.

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The purpose of accounting:

(1) to identify, record, and

communicate the economic events
of
(2) an organization to
(3) interested users.

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The three activities of accounting:

(1)Identifies
(2)Records
(3)Communicates
The economic events of an organization

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Identification of an economic event

An event can be categorized as an

economic event if the event results the
change of the organization’s the financial
position (assets, liabilities, or equity).

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Recording of an economic event

Once an organization identifies an economic event,

the organization records the event in order to provide
a history of the organization’s financial activities.
Recording consists of keeping a systematic,
chronological diary of events, measured in
monetary units.

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Identification of an economic event

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Communication of an economic event
Finally, a company communicates the collected information to
interested users by means of accounting reports.
The most common of these reports are called financial
statements.
To make the reported financial information meaningful, a
company reports the recorded data in a standardized way.
The standardized way accumulates information resulting from
similar transactions.
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Communication of an economic event

A vital element in communicating economic events is the

accountant’s ability to analyse 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.

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The activities of accounting process

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Who uses accounting data?

1. Internal Users
Internal users of accounting information are managers who plan, organize, and run the
business.
2. External Users
External users are individuals and organizations outside a company who want financial
information about the company. The two most common types of external users are
investors and creditors. Investors (owners) use accounting information to make decisions
to buy, hold, or sell ownership shares of a company. Creditors (such as suppliers and
bankers) use accounting information to evaluate the risks of granting credit or lending
money.

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Internal Users of Accounting Data

1. Management
2. Finance
3. Marketing
4. Human Resources

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Questions that internal users ask

To answer these and other questions, internal users need detailed

information on a timely basis.
Managerial accounting users make decisions about their companies.
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External Users of Accounting Data

1. Creditors
2. Investors
3. Customers
4. Labor Union
5. Tax Authority

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Questions that external users ask

Financial accounting answers these questions. It provides economic and

financial information for investors, creditors, and other external users.
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Source:

Weygandt, J.J., Kimmel, P.D., and Kieso, D.E.

2015. Financial Accounting IFRS Edition. 3rd Ed.
John Wiley & Sons, Inc.

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