Question

What is the very purpose of accounting and what types of information does it provide?

Answer 1

Solution

When a business entity exists and operates its business, the investors would want to know whether their investment is generating returns. The lenders would want to know whether the entity is capable of repaying the money it has borrowed from them. Similarly the government of the country in which the entity operates, the employees of the entity, its suppliers and the public at large would want to know the financial position and performance of the entity.

These requirements are addressed by the process called accounting. It is a process in which all the transactions entered into by an entity is recorded and reported by following relevant accounting standards.

It provides information about the financial position, performance and cashflow of an entity. These information are presented in the form of Balance Sheet, Income statement, cashflow statement, statement of changes to equity and notes to accounts which constitute financial statements of an entity.

Information obtained from these statements are used to measure and analyze an entity's operations, position and performance. This facilitates the users of the financial statements to take appropriate decisions.