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    The Purpose of Accounting

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    Define the purpose of accounting and identify the four basic financial statements.

    · Explain how they are interrelated with each other, and why they are useful to managers, investors, creditors, and employees.

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    The primary purpose of accounting is to prepare financial statements that show the performance of a company in a specific period of time, e.g., one year. Eventually, these financial reports will be available to external users such as investors, creditors and tax authorities so that they can use it to evaluate and make economic decisions regarding the company.

    Accounting is providing financial or economic information of a company to those who need it. Companies keep track of transactions by recording, analyzing and retrieving financial information to determine its financial status and provide reports needed in financial decision making. All transactions and activities such as sales, purchases, acquisition of equipment, and others are classified and posted to specific accounts and serve as accounting records which are then recorded in ledgers and journals and are used in creating financial statements. Accounting allows for information to be ready for use by external users so that they can make sound decisions (Balance Sheet). It also helps the firm in managing its finances (Cash Flow Statement). Accounting can assist in a company in planning the company's allocation of financial resources (Income Statement).

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    Solution Summary

    747 words, with references, purpose of accounting, basic financial statements