Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know

By William G. Droms | Go to book overview

4
Accounting -- A Financial
Information System

THE ACCOUNTING PROCESS

Accounting is often referred to as the "universal language of business," and for good reason. The accounting process is a financial information system designed to record, classify, report, and interpret financial data of interest to organizations of all varieties. In the previous chapter, an introduction to basic financial reports -- the balance sheet, the income statement, and the statement of changes in financial position -- was provided. In this chapter, we will examine the logical structure of these statements in more detail. Specifically, we will examine the fundamentals of the double-entry accounting system, which is used as the framework for our financial information system.

Before proceeding to the mechanics of the double-entry accounting system, we must examine one very important accounting concept. This concept, called the accrual concept or matching principle, forms the basis for the measurement of accounting income. Understanding this concept is a virtual prerequisite for an understanding of the double-entry system and of nearly all financial records.


THE ACCRUAL CONCEPT

A short and meaningful statement of exactly what the accrual concept means is probably not possible. For a working definition, we may begin by noting that it has three aspects, which relate to the measurement of revenue, the measurement of expenses, and the matching of revenues and expenses to produce income.

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