WHAT IS ACCOUNTING? (2)

Why is accounting so popular? What consistently ranks as one of the top

career opportunities in business? What frequently rates among the most

popular majors on campus? What was the undergraduate degree chosen

by Nike founder Phil Knight, Home Depot co-founder Arthur Blank, former acting

director of the Federal Bureau of Investigation (FBI) Thomas Pickard, and numerous

members of Congress? Accounting.1 Why did these people choose accounting?

They wanted to understand what was happening financially to their

organizations. Accounting is the financial information system that provides these

insights. In short, to understand your organization, you have to know the numbers.

Accounting
consists of three basic activities—it identifies, records, and communicates

the economic events of an organization to interested users. Let's take a

closer look at these three activities.

Three Activities

To identify economic events, a company selects the economic events relevant to its

business. Examples of economic events are the sale of snack chips by PepsiCo,

providing of telephone services by AT&T, and payment of wages by Ford Motor

Company.

Once a company like PepsiCo identifies economic events, it records those

events in order to provide a history of its financial activities. Recording consists of

keeping a systematic, chronological diary of events, measured in dollars and cents.

In recording, PepsiCo also classifies and summarizes economic events.

Finally, PepsiCo communicates the collected information to interested users by

means of accounting reports. The most common of these reports are called

financial statements. To make the reported financial information meaningful,

Kellogg reports the recorded data in a standardized way. It accumulates information

resulting from similar transactions. For example, PepsiCo accumulates all sales

transactions over a certain period of time and reports the data as one amount in the

company's financial statements. Such data are said to be reported in the aggregate.

By presenting the recorded data in the aggregate, the accounting process simplifies

a multitude of transactions and makes a series of activities understandable and

meaningful.

 

A vital element in communicating economic events is the accountant's ability

to analyze and interpret the reported information. Analysis involves use of ratios,

percentages, graphs, and charts to highlight significant financial trends and relationships.

Interpretation involves explaining the uses, meaning, and limitations of

reported data. Appendix A of this textbook shows the financial statements of

PepsiCo, Inc.; Appendix B illustrates the financial statements of The Coca-Cola

Company. We refer to these statements at various places throughout the text. At

this point, they probably strike you as complex and confusing. By the end of this

course, you'll be surprised at your ability to understand, analyze, and interpret them.

 

You should understand that the accounting process includes the bookkeeping

function. Bookkeeping
usually involves only the recording of economic events. It is

therefore just one part of the accounting process. In total, accounting involves the

entire process of identifying, recording, and communicating economic events.