Scope of Accounting
Accounting is an indispensable discipline within business and finance. Providing essential data to guide decision-making, facilitate resource allocation, and communicate a company’s financial performance to stakeholders, it serves as the backbone of financial information management.
It encompasses a wide range of activities and functions that cater to the diverse needs of businesses, governments, nonprofit organizations, and individuals. Generally, the scope of accounting encompasses the range and extent of activities and functions it performs. In this process, financial data is identified, recorded, classified, summarized, analyzed, interpreted, and communicated about a business or organization.
Its primary purpose is to provide stakeholders with reliable and relevant financial information so they can make informed decisions. Let’s examine the scope of accounting in more detail:
1. Financial Accounting:
In financial accounting, transactions and information of a business entity are recorded, classified, summarized, and presented to external stakeholders. A financial accounting report provides a clear, accurate picture of a company’s financial situation. It consists of a number of components, including:
a. Recording Transactions:
Journals and ledgers are used for recording transactions using the double-entry accounting system, which ensures equal debits and credits for every entry.
b. Financial Statements:
Financial accounting culminates in preparing financial statements, including:
- Balance Sheet: A balance sheet illustrates a company’s assets, liabilities, and equity at a given point in time.
- Income Statement: The income statement presents a company’s revenues, expenses, and profits or losses during a given period of time.
- Cash Flow Statement: A Cash Flow Statement shows how much cash is inflows and outflows during a particular period. It is broken down into three main categories: investment, operations, and financing.
- Shareholders’ Equity Statement: Shows changes in shareholders’ equity over a specific period, including contributions, distributions, and earnings.
c. External Reporting:
An external report is used to provide information to investors, creditors, regulators, and other stakeholders so they can make informed decisions about the company’s future.