Purposes of an accounting system include all the following excepta)Interpret and record the effects of business transaction.b)Classify the effects of transaction to facilitate the preparation of reports.c)Summarize and communicate information to decision makers.d)Dictate the specific types of business enterprise transactions that the enterprises may engage in.Correct answer is option 'D'. Can you explain this answer?

Question

Answer

The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it. This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplier invoices, or through more specialized transactions, known as journal entries.

Once this financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following documents:

Income statement

Balance sheet

Statement of cash flows

Statement of retained earnings

Disclosures that accompany the financial statements

Financial statements are assembled under certain sets of rules, known as accounting frameworks, of which the best known are Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The results shown in financial statements can vary somewhat, depending on the framework used. The framework that a business uses depends upon which one the recipient of the financial statements wants. Thus, a European investor might want to see financial statements based on IFRS, while an American investor might want to see statements that comply with GAAP.

The accountant may generate additional reports for special purposes, such as determining the profit on sale of a product, or the revenues generated from a particular sales region. These are usually considered to be managerial reports, rather than the financial reports issued to outsiders.

Thus, the purpose of accounting centers on the collection and subsequent reporting of financial information.

Answer

Purpose of Accounting System

An accounting system is a systematic and comprehensive process of recording, classifying, and summarizing the financial transactions of a business. The primary purpose of an accounting system is to provide relevant, reliable, and timely financial information to internal and external stakeholders.

The purposes of an accounting system include the following except:

Dictate the specific types of business enterprise transactions that the enterprises may engage in.

The other three purposes are as follows:

Interpret and record the effects of business transaction:
The accounting system helps in interpreting and recording the financial effects of business transactions in a systematic way. It involves identifying the accounts affected, determining the amounts involved, and recording the transactions in the appropriate accounts.

Classify the effects of transaction to facilitate the preparation of reports:
The accounting system classifies the transactions into various categories, such as assets, liabilities, equity, revenue, and expenses, to facilitate the preparation of financial reports. The classification helps in presenting the financial information in a meaningful and understandable manner.

Summarize and communicate information to decision makers:
The accounting system summarizes the financial information and communicates it to the decision makers, such as investors, creditors, and managers, in the form of financial statements. The financial statements provide insights into the financial position, performance, and cash flows of the business, which helps the decision makers in making informed decisions.

In conclusion, the primary purpose of an accounting system is to provide relevant, reliable, and timely financial information to internal and external stakeholders. It involves interpreting and recording the financial effects of business transactions, classifying the transactions, summarizing the information, and communicating it to the decision makers.

Answer

Purpose of Accounting System

An accounting system is a set of processes, procedures, and controls designed to collect, record, classify, summarize, and communicate financial data. The primary purposes of an accounting system are:

1. Interpret and record the effects of business transaction

The first purpose of an accounting system is to interpret and record the effects of business transactions. An accounting system provides a framework for recording and processing financial transactions in an organized and systematic manner. It helps to ensure that all business transactions are properly recorded and classified.

2. Classify the effects of transaction to facilitate the preparation of reports

The second purpose of an accounting system is to classify the effects of transactions to facilitate the preparation of reports. An accounting system classifies financial transactions according to their nature and purpose. This classification allows for the preparation of financial reports that provide information about the financial position and performance of the business.

3. Summarize and communicate information to decision makers

The third purpose of an accounting system is to summarize and communicate information to decision makers. An accounting system generates financial reports that provide useful information to decision makers such as investors, creditors, and management. These reports help decision makers to evaluate the financial position and performance of the business and make informed decisions.

4. Dictate the specific types of business enterprise transactions that the enterprises may engage in

The option 'D' is incorrect because an accounting system does not dictate the specific types of business enterprise transactions that the enterprises may engage in. An accounting system is designed to record and process financial transactions regardless of their nature or purpose. It does not dictate the types of transactions that a business may engage in.

In conclusion, the primary purposes of an accounting system are to interpret and record the effects of business transactions, classify the effects of transactions to facilitate the preparation of reports, and summarize and communicate information to decision makers.

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