In this article you will learn the purpose of accounting and the different types of financial information. We already learned that accounting is the language of business; a means of communicating information about an economic entity to different users for decision-making.
The main purpose of accounting is to provide information to different users to allow them to make rational decisions.
These information include results of operations, financial position, solvency, liquidity, cash flows, and others.
Let's first define economic entity. An economic entity is a separately identifiable organization which makes use of resources to achieve its goals and objectives.
An economic entity may be a business entity operating primarily to generate profit, or a non-profit entity carrying out charitable and not-for-profit operations.
This means that a "business entity or business organization" refers to the for-profit type of economic entity. Some authors use "business entity" to refer to both for-profit and not-for-profit organizations. Nonetheless, all economic entities whether business or non-profit rely on accounting in processing and providing financial information.
From the illustration presented, and for a straightforward answer, it is clear that the ultimate purpose of accounting is to provide information to different users. The users utilize the information in making economic decisions.
It can actually be depicted from some definitions made by accounting bodies. According to the American Institute of Certified Public Accountants (AICPA):
And then, we have another definition – one which has been in use for a long time already – by the American Accounting Association (AAA).
Both of the above definitions and the very nature of accounting suggest its basic purpose – to provide information needed by users in making economic decisions.
Here's a list of the different types of information provided by accounting reports. These things will be clearer when you get to the tutorials on Financial Statements. For now, it would be good to be familiar with what kind of information we are talking about.