This chapter introduces accounting and its functions and provides a short history of accounting, highlighting the roles of both financial and management accounting, and the interaction between both. It also describes the recent developments that have changed the roles of accountants and non-financial managers in relation to the use of financial information. The chapter concludes with a brief critical perspective on accounting.
Businesses exist to provide goods or services to customers in exchange for a financial reward. Public-sector and not-for-profit organizations also provide services, although their funding may be a mix of income from service provision, government funding and charitable donations. While this book is primarily concerned with profit-oriented businesses, most of the principles are equally applicable to the public and not-for-profit sectors. Business is not about accounting. It is about markets, people and operations (the delivery of products or services), although accounting is implicated in all of these decisions because it is the financial representation of business activity.
Although it is quite a dated definition, the American Accounting Association defined accounting in 1966 as:
The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.
This is an important definition because: