Video Transcript: Accounting Defined

Hello and welcome back. Now we're going to discuss what accounting how it's  defined. The American Accounting Association, one of the accounting  organizations discussed later in this introduction, defines accounting as the  process of identifying, measuring and communicating economic information to  permit informed judgments and decisions by the users of that information. This  information is primarily financial, stated in money terms accounting, then is  measured in communication process used to report on the activities of profit  seeking business organizations and non profit organizations as a measurement  and communications process for a business accounting supplies information  that permits informed judgments and decisions by users of that data. The  accounting process provides financial data for a broad range of individuals  whose objectives in studying the data vary widely. Bank officials, for example,  may study a company's financial statement to evaluate the company's ability to  repay a loan, prospective investors may compare accounting data for several  companies to decide which company represents their best investment.  Accounting also supplies management with significant financial data useful for  their decision making. Reliable information is necessary before decision makers  can make a sound decision involving the allocation of scarce resources. The  accounting information is valuable because decision makers can use it to  evaluate the financial consequences of various alternatives. Accounts eliminate  the need for a crystal ball to estimate the future. They can 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 the organization, it also provides financial  data for persons outside the company. This information tells how management  has discharged its responsibility for protecting and managing the company's  resources. Stockholders have the right to know how a company is managing its  investment in fulfilling this obligation. Accountants prepare financial statements,  such as an income statement, a statement of retained earnings, a balance sheet and a statement of cash flows. In addition, they prepare a tax returns for federal  and state governments, as well as fulfillment of other governmental filing  requirements. Excuse me, accounting is often confused with bookkeeping.  Bookkeeping is a mechanical process that records the routine, routine economic activities of that business. Accounting includes bookkeeping, but goes well  beyond scope. In Scope, accountants analyze and interpret financial  information. They prepare the financial statements of that information, analyze,  conduct audits, design accounting systems. They prepare special business and  financial studies, prepare forecasts and budgets and provide tax services.  Specifically, the accounting process consists of the following groups of functions. Accountants observe many events or activities and identify and measure in  financial terms which is dollars, those events considered evidence of economic  activity. Often, these three functions are collectively referred to as analyzed the 

purchase and sale of goods and services are economic events. Next, the  economic events are recorded, classified into meaningful groups and  summarized. Accountants report on economic events or business activity by  preparing financial statements and special reports often accountants, excuse  me, I'm sorry, interpret these statements and report them to various groups such as management, investors and creditors, interpretation may involve determining  how the business is performing compared to prior years and other similar  businesses.