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

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

Communication of consolidated financial data:
Finally, PepsiCo communicates the information collected to interested users through accounting reports. The most common of these reports are called financial statements. The parties interested in the financial information of companies can be classified into three main categories. Stakeholders are Internal, External and Governmental. In order for reported financial information to be meaningful, PepsiCo reports recorded data in a standardized manner. Accumulates information resulting from similar transactions. For example, PepsiCo aggregates all sales transactions over a certain period of time and reports the data as a single amount in the company’s financial statements, said data being reported in the aggregate. By presenting recorded data together, the accounting process simplifies a multitude of transactions and makes a number 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. Analysis involves the use of ratios, percentages, graphs, and charts to highlight significant financial trends and relationships. Interpretation involves explaining the uses, meaning, and limitations of the reported data.