The Nature and Purpose of Accounting

Chapter

The Need for Information

One. The Nature and Purpose of Accounting

Most of the world's work is done through organizations-groups of people who work together to accomplish one or more objectives. In doing its work, an organization uses resources-labor, materials, various services, buildings, and equipment. These resources need to be financed, or paid for. To work effectively, the people in an organization need information about the amounts of these resources, the means of financing them, and the results achieved through using them. Parties outside the organization need similar information to make judgments about the organization. Accounting is a system that provides such information.

Organizations can be classified broadly as either for-profit or nonprofit. As these names suggest, a dominant purpose of organizations in the former category is to earn a profit, whereas organizations in the latter category have other objectives, such as governing, providing social services, and providing education. Accounting is basically similar in both types of organizations.

In its details, information differs greatly among organizations of various types. But viewed broadly, the information needs of most organizations are similar. We shall outline and illustrate these general information needs by referring to Varsity Motors, Inc., an automobile dealership.

Varsity Motors seeks to earn a profit by selling new and used automobiles and parts and accessories, and by providing repair service. It is an organization of fifty-two people headed by Pat Voss, its president. It owns a building that contains the showroom, service shop, a storeroom for parts and accessories, and office space. It also owns a number of new and used automobiles, which it offers for sale; an inventory of spare parts, accessories, and supplies; and cash in the bank. These are examples of the resources the company needs to conduct its business.