Accounting is an information system that identifies, records, analyzes, interprets and communicates the economic data of a financial entity. 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.

Identification of economic events:

Many events happen every day in a company. Some of them are affecting the financial position of the company, while others are not. Events that affect the financial position of a company, that is, Assets = Liabilities + Owner’s Equity, are called Economic Events and are supposed to be recorded in the accounting system. Identify economic events; a company selects the economic events relevant to its business. Examples of economic events are the sale of snacks by PepsiCo, the provision of telephone services by AT&T, and the payment of wages by the Ford Motors Company. Examples of non-economic events at the same companies could be the appointment of a new manager by PepsiCo and the departure of a trusted AT&T employee.

Record of economic events:

Once a company like PepsiCo identifies economic events, it records those events to provide a history of its financial activities. Recording consists of keeping a systematic chronological diary of events, measured in dollars and cents. Recording is done through a process called a double entry bookkeeping system. The system consists of recording, summarizing, verifying mathematical precision, and preparing the statement of financial position.

Communication of consolidated financial data:

Finally, PepsiCo communicates the collected information to interested users through accounting reports. The most common of these reports are called financial statements. The parties interested in the financial information of the company can be classified into three main categories. The interested parties are Internal, External and Government. In order for the reported financial information to be meaningful, PepsiCo reports the reported data in a standardized manner. Accumulate information resulting from similar transactions. For example, PepsiCo accumulates all sales transactions over a certain period of time and reports the data as an amount in the company’s financial statements, such data is said to be reported in aggregate form. By presenting the recorded data together, the accounting process simplifies a multitude of transactions and makes a series of activities understandable and meaningful.

A vital element in the communication of economic events is the ability of the accountant to analyze and interpret the information reported. The analyzes involve the use of ratios, percentages, graphs, and tables to highlight significant financial trends and relationships. Interpretation involves explaining the uses, meaning, and limitations of the reported data.