Importance of accounting | Financial Accounting | BBA Notes
Accounting is an information system which measures, processes and communicates financial information of an organization. The business activities are identified and measured in term of money, which are then processed and finally communicated to the various group of users.
Recognizing and recording of financial transaction
Human memory is subject to limitations. It cannot remember all the details of happenings so written records are required for future use. For example,receipt of cash, payment of cash, purchase and sale of goods, items that are purchased for not for resale etc. are items that need recording. This part of accounting is called the recording function.
Classifying and summarizing
The recorded data are then sorted so that the data can be meaningful to the users. This sorting of accounting data is known as classifying and summarizing. Perhaps, the recorded information would have the least meaning to the various groups of people if such classifications and summaries do not establish whether the business is making profit or loss during a particular period.
Analysis, Interpretation and communication of information
Simply recording, classifying and summarizing is not enough. The accounting experts need to provide their opinion whether or not the business is doing well financially. They should be able to establish the strength and weaknesses of the business with regards to profitability, liquidity, and financial position.