essay about accounting and its importance in business

Accounting in Business Essay

Accounting is referred to as “the language of business”. It is an art of recording, classifying and summarizing information about a business entity in relation to economic resources that are used in finding out the causes of success and failure in business. Due to its relevance in business it has been developed into two models; Management accounting, which deals with reporting financial information to the business stakeholders inside the organization to enhance taking managing and operating decisions; and financial accounting which provides useful information to potential and would-be stakeholders in the organization.

This has affected accounting as it has enabled easier provision of information to different groups of people through assortment of data to be handed to the financial accounting and management accounting (Sterling & Bentz, 54).

Accounting provides a body of rules and legislations that directs reporting of financial information referred to as “Generally Accepted Accounting Standards”. These accounting guidelines are adopted by many organizations and provide a standardized platform for businesses to present their financial information to the interested parties.

Jurisprudence application affects accounts and finance in accordance to the culture, religion, race and political background of the region. This is so as the laws govern the type of financial system regarding to spending, saving, investing, giving, property ownership and business marketing (Smith, Keith & Stephens, 78).

It is assumed in business, that a company cannot manage what it cannot measure. This is where an accounting system comes in handy. Without an accounting system a company cannot ascertain whether it is operating profitably or at a loss; it cannot budget cash flows in a given period; and also it cannot manage customer’s turnover or flow of inventory.

Accounting helps businesses to report accurately business transactions. In an accounting system, axiomatisation is used to show how propositions can fit in a deductive and logical system as they not only exist, but there are methods of creating them. This is through checking all measures and risk available and frequency of the object for easier description.

Accounting tends to facilitate intuitive thinking rather than of rational understanding as it is created with its purpose. This is so as accounting work is elusive, impetus, refractive at classification as they can be acknowledged in more than one way and has different interpretations. Accounting does not regulate as it is has no limits which govern it. This is so as it has no rules and regulations as what to account for or not to due to its diversity in the market of business (Power, 23).

Application of physics fundamentals has enabled development of current accounting technology, for example, accounting softwares and cloud computing. Most companies and institutions are implementing cloud accounting over the use of spreadsheets in accounting. This offers an easier method of maintaining financial records and also offers real time access to information (Kirkland & Howard, 89).

However the accounting field has been faced with numerous problems and challenges in attaining its objectives. Accounting has allowed fraudulent behaviors to go on at the expense of the involved parties. In current times a lot of accounting scandals have been witnessed as a result of loopholes in the accounting systems. More recently was the Madoff scandal which fleeced investors billions of dollars due to failure of legislations within the profession to address issues. Other scandals include Sunbeam, Qwest, Worldcom and Arthur Andersen frauds.

Accounting as a profession has been faced by the problem of malpractice by the accountants and lack of proper legislations to guide the professions. Accounting has primitives only on ungrounded standards as the techniques are not founded as it is extensive and thus requires wide research work.

Accounting is a complex subject and involves expertise and necessary infrastructure to maintain an effective accounting system. Many small and medium businesses do not maintain a proper accounting record due to the rigorous process and also it is expensive to acquire the necessary personnel and infrastructure (Ketz, 203; Yamey, 154).

Works Cited

Ketz, Edward. Accounting Ethics: Crisis in accounting ethics . New York: Routledge Publishers, 2006. Print.

Kirkland, Keith & Howard, Stuart. Simple and practical accounting with computers: a guide to the benefits of computerised accounts . London: Kogan Page, 1998. Print.

Sterling, Robert & Bentz, William. “Accounting in Perspective: Contributions to Accounting Thought by Other Disciplines ”. The Accounting Review , Vol. 46, No. 4. 1971. Print.

Power, Michael. Accounting and science: natural inquiry and commercial reason . London: Cambridge University Press, 1996. Print.

Smith, Jack, Keith, Robert & Stephens, William. Accounting principles . Sabine: McGraw-Hill, 1983 Yamey, Basil. Art & accounting . New York: Yale University Press, 1989. Print.

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Bibliography

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What is Accounting and Why it Matters For Your Business

Reviewed by

March 4, 2022

This article is Tax Professional approved

When you start a business, you’ve suddenly got all kinds of new responsibilities. One of the most important? Business accounting.

But what exactly is accounting? What value does it provide your business? And how much time is it going to require?

The good news is that with the right people, tools, and resources, accounting doesn’t have to be a black hole for your time.

I am the text that will be copied.

In this post, we’ll cover the basics of accounting, from budgets to other accounting functions. But if you want to jump straight to the how-to, you can download our free guide to small business accounting .

A simple definition of accounting

Accounting is how your business records, organizes, and understands its financial information.

You can think of accounting as a big machine that you put raw financial information into—records of all your business transactions, taxes, projections, etc.—that then tells you a story about the financial state of your business.

Accounting is how you get a clear picture of your financial position. It tells you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business are actually making money.

Accounting vs. bookkeeping

Accounting and bookkeeping are both part of the same process: keeping your financial records in order. However, bookkeeping is more concerned with recording everyday financial transactions and operations, while accounting puts that financial data to good use through analysis, strategy, and tax planning.

The accounting cycle

Accounting begins with recording transactions. Business transactions—any activity or event that involves your business’s money—need to be put into your company’s general ledger . Recording business transactions this way is part of bookkeeping.

Bookkeeping is the first step of what accountants call the “ accounting cycle ”: a process designed to take in transaction data and spit out accurate and consistent financial reports.

The accounting cycle has six major steps:

• Analyze and record transactions. Collect any invoices, bank or credit statements, and receipts from business transactions.
• Post journal entries to the ledger. It’s time to take those documents and start making journal entries for your transactions. Journal entries include three components of a transaction: when it happened, what it was for, and how much it was. Some businesses use single-entry accounting where only the expense or revenue is entered. But more common is double-entry accounting, which records each transaction in two accounts: where money is coming from and where it’s going.
• Prepare an unadjusted trial balance. At the end of a reporting period, list all of your business’s accounts and figure out their balances.
• Prepare adjusting entries at the end of the period. When you need to update entries you’ve already made, you prepare adjusting entries. For example, if a client is late on paying an invoice and you offer a 5% discount to help them pay, you would enter the discount as an adjusting entry, as opposed to changing the entry you’ve already made.
• Prepare an adjusted trial balance . After entering in adjusting entries, you’re left with an adjusted trial balance. This information is now ready to be turned into financial statements.
• Prepare financial statements. Finally, all the information you’ve collected is converted into your financial statements. This final step includes summarizing all your financial information into succinct reports for easy review.

Accounting software takes your accounting information and automates most of these rules and processes, so we’re going to skip over the gritty details of the accounting cycle and talk about the end product: financial statements.

Suggested reading: A Beginner’s Guide to The Accounting Cycle

Financial statements

Financial statements are reports that summarize how your business is doing financially.

There are three main types of financial statements: the balance sheet , income statement , and cash flow statement . Together, they tell you where your business’s money is and how it got there.

Let’s say you’re a self-employed surfing instructor who bills clients for surfing lessons. Financial statements can tell you what your most profitable months are, how much money you’ve spent on supplies, and what the total value of your business is.

Accounting software can help you generate financial statements easily, or you can have a bookkeeper do it for you.

Suggested reading: The ROI of Hiring a Bookkeeper

Generally accepted accounting principles (GAAP)

Every company is different, but in order to make accurate financial comparisons between companies, we need a common language to describe each of them. That’s what generally accepted accounting principles (GAAP) are: a series of standards and procedures that accountants at all companies must adhere to when preparing financial statements.

A non-governmental body called the Financial Accounting Standards Board sets the GAAP. While there are no laws enforcing these standards, most lenders and business partners in the United States will require that you adhere to GAAP. If you’re in Canada, you’ll use a different system called International Financial Reporting Standards, or IFRS .

Cash vs. Accrual

You can do your business accounting on a cash or accrual basis. The difference between the two comes down to timing.

Cash basis is the most basic accounting. On a cash basis, you only record transactions when money changes hands. If you receive an invoice on the 10th but don’t pay it until the 15th, the transaction is recorded on the 15th.

With accrual basis, you record transactions twice: when they occur and when they’re paid. For the invoice above, you record the expense on the 10th and the payment on the 15th as two separate transactions.

The method you use depends on what you need from your business finances. Cash basis is simpler and easier to stay on top of, while accrual offers greater insights for more detail-oriented business owners.

Most small businesses have more basic accounting needs, which means cash basis is often the right fit.

Suggested reading: Cash Basis Accounting vs. Accrual Accounting

The different types of accounting

Financial accounting.

Every year, your company will generate financial statements that people outside of your company—people like investors, lenders, government agencies, auditors, potential buyers, etc.—can use to learn more about your business’s financial health and profitability.

Preparing the company’s annual financial statements this way is called financial accounting. If you’re looking to hire a financial accountant, start with looking into how much an accountant costs .

Managerial accounting

Managerial accounting (or management accounting) is similar to financial accounting, with two important exceptions:

• The statements produced by managerial accounting are for internal use only.
• They’re generated much more frequently—often on a quarterly or monthly basis.

If your business ever grows to the point where you need to hire an accountant full-time, most of their time will be taken up by managerial accounting. You’ll be paying them to produce reports that provide regular updates on the company’s financial health and help you interpret those reports.

This is somewhat similar to the work a financial analyst might do, although a financial analyst will also look at past and current trends in the larger economy, not just your business, to inform their recommendations.

Tax accounting

Tax accounting is designed to make sure that you don’t pay more income tax than you are legally required to by the IRS. An example of this is when your accountant provides you with recommendations for how to get the most out of your tax return.

Tax accounting is regulated by the Internal Revenue Service (IRS), and the IRS legally requires that your tax accounting adhere to the Internal Revenue Code (IRC).

Cost accounting

Whenever you’re trying to figure out how to increase your margin or deciding if raising prices is a good idea, you’re doing cost accounting.

Cost accounting involves analyzing all of the costs associated with producing an output (whether it be a physical product or service) in order to make better decisions about pricing, spending, and inventory.

Cost accounting is often a prerequisite of managerial accounting because managers use cost accounting reports to make better business decisions. It also feeds into financial accounting since costing data is often required when compiling a balance sheet.

Credit accounting

Credit accounting involves analyzing all of a company’s unpaid bills and liabilities to make sure that a company’s cash isn’t constantly tied up in paying for them.

Credit accounting can be one of the most difficult kinds of accounting to do well, in part because it’s a difficult subject to be critical about. Talking about debts can be a sensitive, but necessary, conversation.

Why accounting matters for your small business

Accounting helps you plan for growth.

Every great journey begins with a roadmap. When you’re planning your company’s growth, it’s essential to set goals. What should your profits look like one year from now? How about in five years?

Keeping up with your accounting helps you stay on top of your business finances. That information is essential to assess how quickly your business is developing and guide future decision making. Without accurate reporting, you won’t have the full financial picture.

Has your cost of goods sold increased? Are margins thinner? Are your growth goals reasonable? Without financial statements, you won’t have an objective answer.

Accounting is essential for securing a loan

Up-to-date financial statements are essential if you want to fund your small business with a loan.

For instance, suppose you want to apply for a Small Business Association (SBA) loan through one of the big banks. You’ll need to provide, on average, three years of financial statements, plus a one-year cash flow projection . It’s virtually impossible to deliver any of these if you don’t have an accounting system in place.

Suggested reading: What to Prepare When Applying for a Business Loan

You need accounting to attract investors or sell your business

You may not be planning to court investors or sell your business right now, but it’s a good idea to leave your options open. And the best way to do that is to put a proper accounting system in place now.

Potential investors, stakeholders, or buyers will expect accounting records vetted by a CPA (Certified Public Accountant) that prove your business is profitable and on track for growth.

Accounting helps you get paid

When a customer owes you money, it appears as Accounts Receivable (AR) on your balance sheet , which is generated automatically by your accounting software or manually by you or your accountant.

The balance sheet tells you how much of your AR you’ve already pocketed during the month and how much is still outstanding.

By referring to your balance sheet, you can track how effectively you’re collecting payment. Then you can put in place processes—like harder payment deadlines or better follow-up with clients—to make sure you get your hands on the money you’ve earned when you need it.

Accounting helps you stay on top of your debts

If your business owes debts to a variety of sources, like credit cards, loans, and accounts payable, you’ll have to jump into multiple accounts to check what you’re left owing.

The balance sheet shows everything you owe in one place. It also shows all your bank account balances so you can reference both at the same time. It’s the perfect report to review to make sure you have the cash available to tend to your debts and plan future payments.

Accounting keeps you out of jail (or at least saves you from fines)

As your business grows, it can be difficult to keep track of all your tax information reporting obligations. What’s more, if there are mistakes in your financial reports, you run the risk of misreporting your income. Either mistake could land you in hot water with the IRS and other regulators.

Solid accounting gives you complete, accurate financial records , which reduces your risk of breaking tax laws and the chance of an audit . And, when you have an accountant filing your taxes for you, you can be sure they’ll be done accurately and on time.

Accounting helps you pay the right amount of taxes (and not a dollar more)

If you don’t pay your tax bill in full, the IRS will fine you . But they won’t give you a gold star for paying too much.

You can tell you’re paying too much in taxes if your business consistently receives large tax refunds.

Remember: a tax refund isn’t free cash from the IRS. It’s money you’ve overpaid the government that you could’ve used to invest in your business instead.

Refunds are often the result of miscalculated quarterly estimated tax payments . To calculate quarterly estimated tax payments accurately, you need to predict your income. It’s almost impossible to do so without reliable financial records produced through accurate accounting.

Suggested reading: The Top 19 Self-Employment Tax Deductions

What an accountant does

An accountant does more than just year-end tax preparation. A skilled CPA will save you time by communicating your company’s financial state to you in clear language, while anticipating your financial needs.

Accounting professionals like CPAs or tax advisors can also provide you with knowledge and insight that are simply inaccessible to non-accountants. These experts can offer guidance on tax deductions you didn’t know you qualified for, tax rules you didn’t know you were breaking, and best practices picked up while working for other companies in your industry.

If those are tips your business can benefit from right now, it might be time to hire an accountant .

Suggested reading: How to Find an Accountant

Accounting solutions

Small business accounting software has made big advancements as more people take the entrepreneurial path.

The self-service software you use is now almost equal to the accounting software used in firms all over the world. There are now a wide array of options available—which one is best for you depends on your business’s accounting needs.

Freshbooks offers integrated invoicing that makes it simple to manage your accounts receivable and your accounting in one place. Automated bank reconciliation will import all transactions from your business bank accounts, but you will have to review and categorize each one. Their time-tracking functionality also makes it easy for freelancers who bill by the hour. Freshbooks is a good fit for someone generating a lot of invoices with a low number of transactions.

Intuit makes both Quickbooks and a payroll processor, and allows you to bundle both for one monthly cost. The payroll service automates payroll taxes, checks, and all year-end forms, but the accounting platform is mostly manual. While the tool is powerful and can help a skilled user navigate multiple aspects of running a business, it takes a good amount of know-how to get the most out of it.

If you prefer a completely hands-off approach to bookkeeping and accounting, Bench might be right for you. Connect your business bank accounts to have transactions automatically imported, categorized, and reviewed by your personal bookkeeper.

Communication is quick and reliable—the Bench platform allows you to send messages straight to your bookkeeper or set up a call to go over any financial questions that might come up. Our premium package even includes tax filing, which makes all accounting tasks completely automated. Learn more about how Bench can help .

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Why Do We Need Accounting?

• 05 May 2016

Imagine a man who sells apples on the side of the road out of a cardboard box. Every morning, he buys some apples at the grocery store, then walks to his corner. He sells the apples for $1 each until he runs out, then heads home for the day. For the apple seller, accounting is easy. If he wants to know his balance sheet, he looks down in front of him. There are some apples (his inventory) and a cardboard box (his property, plant, and equipment). If he reaches into his pocket and counts the number of dollar bills he has, that’s his cash. Together, those are all of his assets. His equity is exactly equal to his assets – he didn’t borrow any money to buy the apples or the cardboard box in the morning, so he has no liabilities. He can do this whenever he wants to get the current balance sheet of his business. His income statement is just as easy – he remembers how much money he had in his pocket before he left home this morning, and counts how much he has now. The difference is his net income for the day.

One day, a truck of workers passes by and they offer to buy his entire box of apples, but they’ll need to pay him tomorrow. For the apple seller, this is a great deal – he could go home early if he agrees and spend more time with his family, or he could use the money to buy more apples and make a lot more money today. But he would need to keep track of how much the workers owe him for the apples, so he writes a note on the side of his cardboard box. The next day, as he’s buying apples, the man at the counter in the grocery store says, “You know, you buy apples from me every day. You’re my best customer – why not just pay me once a week? That would be easier.” So he starts writing on the side of the box how many apples he buys each day, so he knows how much to pay at the end of the week.

This is an example of accounting in action. The marks on the side of that cardboard box are the beginnings of T-accounts – recording his accounts receivable and his accounts payable – and this apple seller is still running an extremely simple operation. If he opens a bank account, because he’s worried about being robbed while he stands on the side of the street, he’ll need some way to record that. If he decides to hire his son to sell apples two streets over, he’ll need to keep track of how many apples his son has sold and how much to pay him. Suddenly, he can’t generate his balance sheet just by looking in his box.

Very quickly, the benefits to accounting become apparent. Accounting gives us a standardized way to keep track of all of these things, so you can quickly and easily understand your business.

Want to learn more about accounting, economics, and analytics? Check out HBX CORe , an interactive online program from Harvard Business School!

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The Role of Accounting in Business: A Comprehensive Guide

• ATMC Profiles , Student Life

In the fast-paced world of business, accounting plays a pivotal role in providing accurate financial information, guiding decision-making, and ensuring compliance. Often referred to as the language of business, accounting serves as a crucial framework for organisations to manage their financial affairs. In this article, we will explore the multifaceted role of accounting, shedding light on its importance in driving success and facilitating effective business operations.

At its core, accounting serves as the foundation of financial management within an organisation. By systematically recording, summarising, and analysing financial transactions, accounting provides a comprehensive view of a company’s financial health. It enables businesses to assess their profitability, liquidity, and solvency, thereby guiding strategic decision-making.

One of the primary functions of accounting is to ensure accurate financial reporting. Through various accounting principles, concepts, and standards, companies can present reliable financial statements to stakeholders, including investors, creditors, and regulatory authorities. These financial statements, such as the balance sheet, income statement, and cash flow statement, offer insights into the organisation’s assets, liabilities, revenues, expenses, and cash flow, enabling informed assessments of its financial performance.

Accounting provides a wealth of financial data that organisations can leverage for insightful analysis and decision-making. Financial analysis techniques, such as ratio analysis, trend analysis, and benchmarking, allow businesses to evaluate their performance, identify areas of improvement, and make informed strategic choices. By examining profitability ratios, liquidity ratios, and efficiency ratios, companies can assess their competitiveness and devise strategies for growth and profitability.

Accounting plays a vital role in budgeting and planning, allowing businesses to set financial goals and allocate resources effectively. Through the budgeting process, organisations can forecast their expenses, revenues, and cash flow for a specific period. This helps in identifying potential financial gaps, managing costs, and ensuring optimal resource allocation. Budgeting enables companies to align their financial objectives with their overall business strategy, fostering financial discipline and accountability.

Another critical aspect of accounting is establishing internal controls to ensure compliance with laws, regulations, and industry standards. Accounting systems and practices help organisations safeguard their assets, prevent fraud, and maintain accurate records. Internal controls involve processes and procedures that monitor financial activities, detect errors or irregularities, and mitigate risks. By adhering to sound accounting principles and implementing robust internal controls, businesses enhance transparency, accountability, and the overall integrity of their financial operations.

Auditing provides an independent assessment of a company’s financial statements and internal controls. External auditors review the financial records, transactions, and processes to verify their accuracy and compliance with relevant standards. Auditing enhances confidence in the reliability of financial information, reassuring stakeholders and investors. It also serves as a mechanism to identify potential weaknesses in financial management practices and suggests improvements, thereby promoting accountability and good governance.

Accounting is a cornerstone of business operations, providing essential financial information for decision-making, regulatory compliance, and performance evaluation. By understanding the role of accounting in business, students and professionals alike can appreciate its significance and develop the skills necessary to navigate the dynamic world of finance with confidence.

Remember, accounting is not just about numbers; it’s about interpreting financial data to drive informed decisions and contribute to the success of organisations across industries.

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Chapter 12: The Role of Accounting in Business

A new form of gps: the gregarious people seeker.

Things are moving so fast we really don’t know what’s going to happen.

Naveen Selvadurai, cofounder of Foursquare

Let’s say that you’re doing your economics homework, trying to calculate the effect of the recession on room rates in Fort Lauderdale (Brady, 2010; Hasseldahl, 2010; Foursquare, 2010). For some reason, you get a sinking feeling that your friends are out somewhere having fun without you. What’s a quick way to find out where they are and what they’re up to? If you’re signed up, you can “check in” with the Foursquare app on your smartphone, tablet PC, or whatever device you use to connect to a wireless network. Foursquare is a mobile social network, and in addition to the handy “friend finder” feature, you can use it to find new and interesting places around your neighborhood to do whatever you and your friends like to do. It even rewards you for doing business with sponsor companies, such as local restaurants.

Foursquare, which has been getting a lot of buzz lately, was started in 2009 by two young entrepreneurs, Dennis Crowley and Naveen Selvadurai. It’s already attracted more than a million users, and Crowley and Selvadurai are understandably enthusiastic about their prospects. Not everybody, however, is as optimistic as they are. Right now, Foursquare is bringing in money and growing, but let’s face facts—it’s a start-up and it’s barely two years old. Among the experts who pay attention to the business of software apps, Foursquare has both optimists and skeptics, and, as usual, there a lot of people who think that Crowley and Selvadurai should take the money and run—that is, sell out to a larger company and move on.

Clearly, Crowley and Selvadurai have some questions to answer and—at some point, if not necessarily right now—decisions to make. This is where they’ll have to rely on an accountant, because they’ll need somebody with a knowledge of accounting to help them ask and answer the right questions and formulate and make the right decisions: How much revenue are we bringing in? Can we increase it? What are our expenses? Will they continue to get higher or can we cut them? How much money are we actually making? Are we operating at a profit or a loss? How much do we have invested in the company? How much debt do we have? Can we pay our bills on time? If we need more money, where can we get it? How much cash do we have on hand? How much cash comes in each month and how much goes out? How long will it last? How much is our business really worth? If we decide to sell it, how much should we ask for it? Is it a good idea to put more of our own money into the venture? What are the odds that Foursquare will succeed?

In this chapter, we’ll learn how to gather, summarize, and interpret accounting information and how to use it in making business decisions like the ones facing Crowley and Selvadurai.

Brady, D., “Social Media’s New Mantra: Location, Location, Location,” Bloomberg BusinessWeek , May 6, 2010, http://www.businessweek.com/magazine/content/10_20/b4178034154012.htm (accessed May 13, 2010)

Foursquare, http://foursquare.com (accessed May 13, 2010).

Hesseldahl, A., “Foursquare Tries Broadening Its Appeal,” Bloomberg BusinessWeek , April 19, 2010, http://www.businessweek.com/technology/content/apr2010/tc20100416_035687.htm (accessed May 13, 2010).

Exploring Business Copyright © 2016 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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Module 1: The Role of Accounting in Business

Putting it together: the role of accounting in business.

Accounting is more than just the “language of business.” It’s one of the vital information systems that feed the beating heart of a company.

For-profit businesses provide goods and services that are in demand, but the only way they stay in business is if they are making a profit, and in this competitive world, making a profit can be a challenge even on something that is in high demand. Accounting provides both internal and external stakeholders the information they need to make critical business decisions.

Financial Accounting Reports

• Income statement
• Statement of owner’s equity
• Balance sheet
• Statement of cash flows

If you try a quick search for the financial statements of a company you think is publicly traded—like General Electric, Ford Motor Company, or Walmart—you’ll likely be able to find these financial statements.

Go to the company’s website, and look for a section called “investor relations” or something similar. You’ll want to look for the annual report. Often, the annual report is 70–100 pages, but if you dig through a bit, you’ll find the actual financial statements along with a few dozen pages of disclosures (sometimes called Notes or Footnotes). It’s a lot of information, but it will give you a good idea of the complexity and extent of the financial accountant’s job. You can also look for the company’s 10-K, which typically contains the same information. The 10-K is the official form that a company uses to submit its official audited annual report to the SEC.

As you are looking through an annual report or Form 10-K, you may notice that the names of the reports are slightly different, but the content should be recognizable. The income statement may be called a Statement of Earnings, or a P&L (Profit and Loss), but it will still show revenues minus expenses and the resulting net income. The balance sheet may be called the Statement of Financial Position, but it will still show Assets being equal to Liabilities plus Equity. Also, since the company you research will most likely be a corporation, the statement of owner’s equity will probably be called a Statement of Stockholders’ Equity and there may also be a Statement of Retained Earnings and a Statement of Other Comprehensive Income.

Managerial Accounting Reports

From the day the business opens its doors with the first investment of capital, through lean years and robust ones, through mergers and product line changes, until the last dollar is made and the doors close at some far point in the future, the financial information gathered and reported on by accountants is the thread that ties it all together.

You’ve only just begun to learn all there is to know about accounting. In fact, you’ll never stop learning. There’s always something new around the corner. As business and commerce continue to change and develop, so does accounting.

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1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting

Accounting is the process of organizing, analyzing, and communicating financial information that is used for decision-making. Financial information is typically prepared by accountants —those trained in the specific techniques and practices of the profession. This course explores many of the topics and techniques related to the accounting profession. While many students will directly apply the knowledge gained in this course to continue their education and become accountants and business professionals, others might pursue different career paths. However, a solid understanding of accounting can for many still serve as a useful resource. In fact, it is hard to think of a profession where a foundation in the principles of accounting would not be beneficial. Therefore, one of the goals of this course is to provide a solid understanding of how financial information is prepared and used in the workplace, regardless of your particular career path.

Think It Through

Every job or career requires a certain level of technical expertise and an understanding of the key aspects necessary to be successful. The time required to develop the expertise for a particular job or career varies from several months to much longer. For instance, doctors, in addition to the many years invested in the classroom, invest a significant amount of time providing care to patients under the supervision of more experienced doctors. This helps medical professionals develop the necessary skills to quickly and effectively diagnose and treat the various medical conditions they spent so many years learning about.

Accounting also typically takes specialized training. Top accounting managers often invest many years and have a significant amount of experience mastering complex financial transactions. Also, in addition to attending college, earning professional certifications and investing in continuing education are necessary to develop a skill set sufficient to becoming experts in an accounting professional field.

The level and type of training in accounting are often dependent on which of the myriad options of accounting fields the potential accountant chooses to enter. To familiarize you with some potential opportunities, Describe the Varied Career Paths Open to Individuals with an Accounting Education examines many of these career options. In addition to covering an assortment of possible career opportunities, we address some of the educational and experiential certifications that are available. Why do you think accountants (and doctors) need to be certified and secure continuing education? In your response, defend your position with examples.

In addition to doctors and accountants, what other professions can you think of that might require a significant investment of time and effort in order to develop an expertise?

A traditional adage states that “accounting is the language of business.” While that is true, you can also say that “accounting is the language of life.” At some point, most people will make a decision that relies on accounting information. For example, you may have to decide whether it is better to lease or buy a vehicle. Likewise, a college graduate may have to decide whether it is better to take a higher-paying job in a bigger city (where the cost of living is also higher) or a job in a smaller community where both the pay and cost of living may be lower.

In a professional setting, a theater manager may want to know if the most recent play was profitable. Similarly, the owner of the local plumbing business may want to know whether it is worthwhile to pay an employee to be “on call” for emergencies during off-hours and weekends. Whether personal or professional, accounting information plays a vital role in all of these decisions.

You may have noticed that the decisions in these scenarios would be based on factors that include both financial and nonfinancial information. For instance, when deciding whether to lease or buy a vehicle, you would consider not only the monthly payments but also such factors as vehicle maintenance and reliability. The college graduate considering two job offers might weigh factors such as working hours, ease of commuting, and options for shopping and entertainment. The theater manager would analyze the proceeds from ticket sales and sponsorships as well as the expenses for production of the play and operating the concessions. In addition, the theater manager should consider how the financial performance of the play might have been influenced by the marketing of the play, the weather during the performances, and other factors such as competing events during the time of the play. All of these factors, both financial and nonfinancial, are relevant to the financial performance of the play. In addition to the additional cost of having an employee “on call” during evenings and weekends, the owner of the local plumbing business would consider nonfinancial factors in the decision. For instance, if there are no other plumbing businesses that offer services during evenings and weekends, offering emergency service might give the business a strategic advantage that could increase overall sales by attracting new customers.

This course explores the role that accounting plays in society. You will learn about financial accounting , which measures the financial performance of an organization using standard conventions to prepare and distribute financial reports. Financial accounting is used to generate information for stakeholders outside of an organization, such as owners, stockholders, lenders, and governmental entities such as the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS).

Financial accounting is also a foundation for understanding managerial accounting , which uses both financial and nonfinancial information as a basis for making decisions within an organization with the purpose of equipping decision makers to set and evaluate business goals by determining what information they need to make a particular decision and how to analyze and communicate this information. Managerial accounting information tends to be used internally, for such purposes as budgeting, pricing, and determining production costs. Since the information is generally used internally, you do not see the same need for financial oversight in an organization’s managerial data.

You will also note in your financial accounting studies that there are governmental and organizational entities that oversee the accounting processes and systems that are used in financial accounting. These entities include organizations such as the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the Public Company Accounting Oversight Board (PCAOB). The PCAOB was created after several major cases of corporate fraud, leading to the Sarbanes-Oxley Act of 2002, known as SOX. If you choose to pursue more advanced accounting courses, especially auditing courses, you will address the SOX in much greater detail.

For now, it is not necessary to go into greater detail about the mechanics of these organizations or other accounting and financial legislation. You just need to have a basic understanding that they function to provide a degree of protection for those outside of the organization who rely on the financial information.

Whether or not you aspire to become an accountant, understanding financial and managerial accounting is valuable and necessary for practically any career you will pursue. Management of a car manufacturer, for example, would use both financial and managerial accounting information to help improve the business. Financial accounting information is valuable as it measures whether or not the company was financially successful. Knowing this provides management with an opportunity to repeat activities that have proven effective and to make adjustments in areas in which the company has underperformed. Managerial accounting information is likewise valuable. Managers of the car manufacturer may want to know, for example, how much scrap is generated from a particular area in the manufacturing process. While identifying and improving the manufacturing process (i.e., reducing scrap) helps the company financially, it may also help other areas of the production process that are indirectly related, such as poor quality and shipping delays.

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• Authors: Mitchell Franklin, Patty Graybeal, Dixon Cooper
• Publisher/website: OpenStax
• Book title: Principles of Accounting, Volume 1: Financial Accounting
• Publication date: Apr 11, 2019
• Location: Houston, Texas
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• Section URL: https://openstax.org/books/principles-financial-accounting/pages/1-1-explain-the-importance-of-accounting-and-distinguish-between-financial-and-managerial-accounting

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Today in America, we face a new economic era where, day by day, labor-driven jobs disappear, being replaced by an ever-increasing number of better-paying, general management jobs. If you work for a company and are currently managing any aspect of the company, or if you aspire to move up to management, then you need to understand what accounting is. Moreover, if you are an entrepreneur, or you ever plan to start your own business, you need to understand, at the very least, the basic principles of accounting.

Many times, people hired into high-ranking positions in corporate America have no concept of basic accounting. In fact, at the mere mention of the word "accounting" they become withdrawn and quiet. Yet these same managers are somehow going to increase sales and overall profit of a company.

Learning accounting is like any new skill. There is a learning curve, and the skill needs to be practiced, or used in this case, in order for it to be effective. If you have access to your company's financial statements, please take the time to apply our examples to your company's financials.

Those of us who are born as right-brain thinkers tend to be better at creative, imaginative, passionate activities. Then there are those of us who are left-brain thinkers, naturally adept at working with numbers, applying logical reasoning, and analytically solving problems.

Regardless of which category you fall into, the truth is that anyone can learn the basic principles of accounting and develop a knack for managing the financial aspects of a business. The upside of learning basic accounting principles is that, regardless of whether it is a large Fortune 500 company or a small entrepreneurial start-up, the same fundamental rules apply when working with the bottom line.

" Accounting is a system of recording, analyzing and verifying an organization's financial history ."

-- Insurance Information Institute Web site.

Widely referred to as the "language of business ," accounting is formally defined as the practice of objectively measuring and reporting on a summary of an individual or business's financial transactions.

In a more simplified description, accounting is the process of producing timely, accurate, and understandable information about a company's financial status.

Accounting: Stereotype

While practicing an honorable profession, accountants have long gotten a bad reputation as being somewhat humorless "bean counters" (think of the character Leo Bloom in Mel Brooks' Broadway hit play The Producers ). Perhaps this stoic image is not so bad when you consider that accountants simply pride themselves on being sticklers about getting accurate numbers, to the point of making it as close to an exact science as possible.

Accounting: Big Picture and Stats

While number-crunching and a great attention to detail may come easily to the more than 2 million individuals trained as accountants, bookkeepers, and auditors, someone who does not have the same level of experience may be less than comfortable tackling the financial side of a business's operations.

To those lacking specialized know-how, even the most general accounting procedures can seem overwhelming. When broken down into individual parts, however, the process becomes more manageable and decidedly simpler to understand.

At present, there are close to a million accountants in the United States. Of this vast group, the majority tends to have a keen ability for swiftly analyzing, comparing, and interpreting facts and figures. The prospective accountant also needs to have the skills necessary to convey findings to clients and managers, and must be vigilant about staying up to date on the latest policies pertaining to financial accounting procedures.

Today in the world of accounting, you will find a new focus on ethics and on the use of computer technology. Historically, accounting began as a pen-to-paper practice in which all data was kept within a centralized ledger. In order to remain current, new information, or entries, had to be added on a consistent basis.

While many of the original accounting practices are still in use today, they no longer entail entries being made by hand but instead rely upon data logged into well-appointed computer programs.

In addition to their traditional repertoire of bookkeeping and compliance oversight, accountants moving into the new millennium have developed a future-forward perspective, equally concerned with charting numerical data and with overall business strategy and financial projections.

The emergence of technology is not the only area of accounting that has been overhauled. Accountants have steadily focused their efforts on adding advanced certifications. Thus, as a whole, they are continually becoming more competitive and knowledgeable of changes that affect their industry and their clients' industries as well.

HISTORY OF ACCOUNTING

What place in history does accounting have, you ask? Probably a much more prominent position than you may have originally thought. Throughout history, accountants have made sizable contributions to the development of cities, trade, and industry, not to mention the formulation of the practice by which numbers came to represent wealth.

It is no exaggeration to say that accountants were highly involved in the notation and development of formalized systems for recording interactions that involved money and banking. Furthermore, accountants invented the double-entry bookkeeping system that helped keep the Italian Renaissance afloat, rescued many Industrial Revolution inventors and entrepreneurs from the brinks of bankruptcy, and helped propel Western capitalism by instilling confidence in capital markets.

Accounting: Historically Speaking

When discussing the history of accounting as a profession within the U.S., one seminal event tends to be repeatedly mentioned. This most memorable occurrence was the invention and widespread employment of the bookkeeping method known as the "double-entry process."

In 1494, the first book on mathematics by Luca Pacioli , considered to be the father of accounting, was published. Section 9 of the book is a thesis on the subject of double-entry bookkeeping .

First Accounting System: Identifiable Features

The first public disclosure of bookkeeping relayed the practices of Venetian merchants who used the system to keep a rein on the movement of their inventory. In its original documentation, the bookkeeping method was said to be distinguishable by the following features:

1 . To maintain a diligent business, one must have a cash supply, a good accountant, and a sharp bookkeeper to arrange all of the business in terms of debit and credit.

2. Though the opening inventory was addressed, the closing inventory was not mentioned.

3. The account book system comprised three account books: a daybook, or formal account book; the journal; and the ledger.

4 . Without fail, all pertinent happenings related to a transaction were required to be entered into the daybook.

5 . Debit and credit were described as "per" and "A" in the journal, and "die dare" and "die havere" in the ledger.

To explain why the double-entry bookkeeping system was developed in 15th century Italy rather than ancient Greece or Rome, the pre-eminent accounting scholar A. C. Littleton described seven probable contributing factors :

Private property-- power to change ownership for bookkeeping focuses on the recording of facts pertaining to property and property rights.

Capital-- allocation of wealth, for otherwise commerce would be unable to flourish and credit would not need to exist.

Commerce-- widespread interchange of goods for trading on a purely localized level would limit the volume of quantities involved, hence, diminishing the need to create an organized business model to replace a fledgling system of record-keeping.

Credit-- the present use of future resources, for there would have been little reason to record transactions at the time of occurrence.

Writing-- means for maintaining a permanent record within a universal language.

Money-- considered the "common denominator" for exchanges, without it there is no need for bookkeeping, which abbreviates transactions to a set of monetary values for recording and tracking purposes.

Arithmetic-- means for tabulating the monetary component of the transaction.

The majority of these conditions and factors did not appear simultaneously until the Middle Ages, when need demanded the development of the double-entry system.

While writing is a skill that is as old as civilization itself, arithmetic, meaning the systematic manipulation of number symbols, was not a tool utilized by the ancients. Just the opposite is true. Long after the introduction of Arabic numerals, Roman numerals continued to be used to record financial transactions.

Interestingly, today we experience problems with record-keeping, control, verification, and financial dealings that are similar to those of the ancients.

Particularly in the area of taxes, governments have a long history of needing to maintain diligent records of receipts and disbursements. The absence of a single, cohesive system to expedite such activities as record-keeping, data collection, and confirmation of numerical figures made the ancient accountant's job incredibly challenging.

Furthermore, in societies where nearly all citizens were illiterate, writing materials were expensive, numeration was difficult, and money systems were inconsistent. Transactions needed to be extremely value-laden to justify the employment of an accounting record.

Accounting: Present Day

According to the Web site www.CPAFinder.com , accounting is regarded today as the systematic development and analysis of information pertaining to the economic affairs of an organization. In addition, one of the most important purposes of accounting is the ability to communicate relevant information between and among producers and end-users of such information.

The purpose of such integral information includes:

• Aiding operational managers in terms of planning and control.
• Helping owners, regulatory bodies, and legislative entities appraise the organization's performance and, based upon the findings, make decisions concerning the future.
• Determining whether owners, lenders, suppliers, employees, and/or others spend more or less money on the organization and, in the case of governmental bodies, such critical information is used to determine the amount of tax the organization is obligated to pay.
• From the consumer perspective, helping to establish a price when contracts call for cost-based payments.

Purpose of Accounting: Summary

In a nutshell, accounting, as a whole, accounts for such activities as maintenance of files of data, analysis and interpretation of data, and preparation of multiple types of reports.

In the general sense, the accounting documentation process encompasses the accountant's observation of how a specific organization functions, keeps records, and generates reports.

To this very day, it is accountants who continue to fuel the information revolution, which in turn helps to transform the world's economy.

The current world of business and accounting is wholly integrated with the computer and the Information Revolution, which, though ongoing for more than half a century, has literally exploded as we enter into the millennium.

Computers possess the intelligence and systematic capability to proficiently and efficiently expedite numbers pertaining to accounts receivable and payable, inventories, and payrolls.

One of the first major computers to lead the way was IBM's Big Blue mainframe model. As technology raced to meet newer and higher expectations, the industry developed desktop and personal computers and, ultimately, laptop computers based upon users' need or desire for increased mobility, portability, and constant accessibility.

Making the demand for technology solutions even more urgent, globally based capital markets operate 24 hours a day and are wholly dependent upon accounting data. With continual advancements being made within the world of technology, accountants are increasingly challenged to provide continuous streams of information.

Interlinked in many ways, advancements in technology correlate to progress in accounting.

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1.4: Explain Why Accounting Is Important to Business Stakeholders

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The number of decisions we make in a single day is staggering. For example, think about what you had for breakfast this morning. What pieces of information factored into that decision? A short list might include the foods that were available in your home, the amount of time you had to prepare and eat the food, and what sounded good to eat this morning. Let’s say you do not have much food in your home right now because you are overdue on a trip to the grocery store. Deciding to grab something at a local restaurant involves an entirely new set of choices. Can you think of some of the factors that might influence the decision to grab a meal at a local restaurant?

Daily Decisions

Many academic studies have been conducted on the topic of consumer behavior and decision-making. It is a fascinating topic of study that attempts to learn what type of advertising works best, the best place to locate a business, and many other business-related activities.

One such study, conducted by researchers at Cornell University, concluded that people make more than 200 food-related decisions per day. 2

This is astonishing considering the number of decisions found in this particular study related only to decisions involving food. Imagine how many day-to-day decisions involve other issues that are important to us, such as what to wear and how to get from point A to point B. For this exercise, provide and discuss some of the food-related decisions that you recently made.

In consideration of food-related decisions, there are many options you can consider. For example, what types, in terms of ethnic groups or styles, do you prefer? Do you want a dining experience or just something inexpensive and quick? Do you have allergy-related food issues? These are just a few of the myriad potential decisions you might make.

It is no different when it comes to financial decisions. Decision makers rely on unbiased, relevant, and timely financial information in order to make sound decisions. In this context, the term stakeholder refers to a person or group who relies on financial information to make decisions, since they often have an interest in the economic viability of an organization or business. Stakeholders may be stockholders, creditors, governmental and regulatory agencies, customers, management and other employees, and various other parties and entities.

Stockholders

A stockholder is an owner of stock in a business. Owners are called stockholders because in exchange for cash, they are given an ownership interest in the business, called stock. Stock is sometimes referred to as “shares.” Historically, stockholders received paper certificates reflecting the number of stocks owned in the business. Now, many stock transactions are recorded electronically. Introduction to Financial Statements discusses stock in more detail. Corporation Accounting offers a more extensive exploration of the types of stock as well as the accounting related to stock transactions.

Recall that organizations can be classified as for-profit, governmental, or not-for-profit entities. Stockholders are associated with for-profit businesses. While governmental and not-for-profit entities have constituents, there is no direct ownership associated with these entities.

For-profit businesses are organized into three categories: manufacturing, retail (or merchandising), and service. Another way to categorize for-profit businesses is based on the availability of the company stock (see Table 1.1 ). A publicly traded company is one whose stock is traded (bought and sold) on an organized stock exchange such as the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotation (NASDAQ) system. Most large, recognizable companies are publicly traded, meaning the stock is available for sale on these exchanges. A privately held company , in contrast, is one whose stock is not available to the general public. Privately held companies, while accounting for the largest number of businesses and employment in the United States, are often smaller (based on value) than publicly traded companies. Whereas financial information and company stock of publicly traded companies are available to those inside and outside of the organization, financial information and company stock of privately held companies are often limited exclusively to employees at a certain level within the organization as a part of compensation and incentive packages or selectively to individuals or groups (such as banks or other lenders) outside the organization.

Publicly Held versus Privately Held Companies

Whether the stock is owned by a publicly traded or privately held company, owners use financial information to make decisions. Owners use the financial information to assess the financial performance of the business and make decisions such as whether or not to purchase additional stock, sell existing stock, or maintain the current level of stock ownership.

Other decisions stockholders make may be influenced by the type of company. For example, stockholders of privately held companies often are also employees of the company, and the decisions they make may be related to day-to-day activities as well as longer-term strategic decisions. Owners of publicly traded companies, on the other hand, will usually only focus on strategic issues such as the company leadership, purchases of other businesses, and executive compensation arrangements. In essence, stockholders predominantly focus on profitability, expected increase in stock value, and corporate stability.

Creditors and Lenders

In order to provide goods and services to their customers, businesses make purchases from other businesses. These purchases come in the form of materials used to make finished goods or resell, office equipment such as copiers and telephones, utility services such as heating and cooling, and many other products and services that are vital to run the business efficiently and effectively.

It is rare that payment is required at the time of the purchase or when the service is provided. Instead, businesses usually extend “credit” to other businesses. Selling and purchasing on credit, which is explored further in Merchandising Transactions and Accounting for Receivables , means the payment is expected after a certain period of time following receipt of the goods or provision of the service. The term creditor refers to a business that grants extended payment terms to other businesses. The time frame for extended credit to other businesses for purchases of goods and services is usually very short, typically thirty-day to forty-five-day periods are common.

When businesses need to borrow larger amounts of money and/or for longer periods of time, they will often borrow money from a lender , a bank or other institution that has the primary purpose of lending money with a specified repayment period and stated interest rate. If you or your family own a home, you may already be familiar with lending institutions. The time frame for borrowing from lenders is typically measured in years rather than days, as was the case with creditors. While lending arrangements vary, typically the borrower is required to make periodic, scheduled payments with the full amount being repaid by a certain date. In addition, since the borrowing is for a long period of time, lending institutions require the borrower to pay a fee (called interest) for the use of borrowing. These concepts and the related accounting practices are covered in Long-Term Liabilities . Table 1.2 Summarizes the differences between creditors and lenders.

Creditor versus Lender

Both creditors and lenders use financial information to make decisions. The ultimate decision that both creditors and lenders have to make is whether or not the funds will be repaid by the borrower. The reason this is important is because lending money involves risk. The type of risk creditors and lenders assess is repayment risk—the risk the funds will not be repaid. As a rule, the longer the money is borrowed, the higher the risk involved.

Recall that accounting information is historical in nature. While historical performance is no guarantee of future performance (repayment of borrowed funds, in this case), an established pattern of financial performance using historical accounting information does help creditors and lenders to assess the likelihood the funds will be repaid, which, in turn, helps them to determine how much money to lend, how long to lend the money for, and how much interest (in the case of lenders) to charge the borrower.

Sources of Funding

Besides borrowing, there are other options for businesses to obtain or raise additional funding (also often labeled as capital). It is important for the business student to understand that businesses generally have three ways to raise capital: profitable operations is the first option; selling ownership—stock—which is also called equity financing, is the second option; and borrowing from lenders (called debt financing) is the final option.

In Introduction to Financial Statements , you’ll learn more about the business concept called “profit.” You are already aware of the concept of profit. In short, profit means the inflows of resources are greater than the outflow of resources, or stated in more business-like terms, the revenues that the company generates are larger or greater than the expenses. For example, if a retailer buys a printer for $150 and sells it for $320, then from the sale it would have revenue of $320 and expenses of $150, for a profit of $170. (Actually, the process is a little more complicated because there would typically be other expenses for the operation of the store. However, to keep the example simple, those were not included. You’ll learn more about this later in the course.)

Developing and maintaining profitable operations (selling goods and services) typically provides businesses with resources to use for future projects such as hiring additional workers, maintaining equipment, or expanding a warehouse. While profitable operations are valuable to businesses, companies often want to engage in projects that are very expensive and/or are time sensitive. Businesses, then, have other options to raise funds quickly, such as selling stock and borrowing from lenders, as previously discussed.

An advantage of selling stock to raise capital is that the business is not committed to a specific payback schedule. A disadvantage of issuing new stock is that the administrative costs (legal and compliance) are high, which makes it an expensive way to raise capital.

There are two advantages to raising money by borrowing from lenders. One advantage is that the process, relative to profitable operations and selling ownership, is quicker. As you’ve learned, lenders (and creditors) review financial information provided by the business in order to make assessments on whether or not to lend money to the business, how much money to lend, and the acceptable length of time to lend. A second, and related, advantage of raising capital through borrowing is that it is fairly inexpensive. A disadvantage of borrowing money from lenders is the repayment commitments. Because lenders require the funds to be repaid within a specific time frame, the risk to the business (and, in turn, to the lender) increases.

These topics are covered extensively in the area of study called corporate finance. While finance and accounting are similar in many aspects, in practicality finance and accounting are separate disciplines that frequently work in coordination in a business setting. Students may be interested to learn more about the educational and career options in the field of corporate finance. Because there are many similarities in the study of finance and accounting, many college students double major in a combination of finance, accounting, economics, and information systems.

CONCEPTS IN PRACTICE

What is profit? In accounting, there is general consensus on the definition of profit. A typical definition of profit is, in effect, when inflows of cash or other resources are greater than outflows of resources.

Ken Blanchard provides another way to define profit. Blanchard is the author of The One Minute Manager , a popular leadership book published in 1982. He is often quoted as saying, “profit is the applause you get for taking care of your customers and creating a motivating environment for your people [employees].” Blanchard’s definition recognizes the multidimensional aspect of profit, which requires successful businesses to focus on their customers, employees, and the community.

Check out this short video of Blanchard’s definition of profit for more information. What are alternative approaches to defining profit?

Governmental and Regulatory Agencies

Publicly traded companies are required to file financial and other informational reports with the Securities and Exchange Commission (SEC) , a federal regulatory agency that regulates corporations with shares listed and traded on security exchanges through required periodic filings Figure 1.6 . The SEC accomplishes this in two primary ways: issuing regulations and providing oversight of financial markets. The goal of these actions is to help ensure that businesses provide investors with access to transparent and unbiased financial information.

As an example of its responsibility to issue regulations, you learn in Introduction to Financial Statements that the SEC is responsible for establishing guidelines for the accounting profession. These are called accounting standards or generally accepted accounting principles (GAAP). Although the SEC also had the responsibility of issuing standards for the auditing profession, they relinquished this responsibility to the Financial Accounting Standards Board (FASB).

In addition, you will learn in Describe the Varied Career Paths Open to Individuals with an Accounting Education that auditors are accountants charged with providing reasonable assurance to users that financial statements are prepared according to accounting standards. This oversight is administered through the Public Company Accounting Oversight Board (PCAOB), which was established in 2002.

The SEC also has responsibility for regulating firms that issue and trade (buy and sell) securities—stocks, bonds, and other investment instruments.

Enforcement by the SEC takes many forms. According to the SEC website, “Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.” 3 Financial information is a valuable tool that is part of the investigatory and enforcement activities of the SEC.

Financial Professionals and Fraud

You may have heard the name Bernard “Bernie” Madoff. Madoff ( Figure 1.7 ) was the founder of an investment firm, Bernard L. Madoff Investment Securities . The original mission of the firm was to provide financial advice and investment services to clients. This is a valuable service to many people because of the complexity of financial investments and retirement planning. Many people rely on financial professionals, like Bernie Madoff, to help them create wealth and be in a position to retire comfortably. Unfortunately, Madoff took advantage of the trust of his investors and was ultimately convicted of stealing (embezzling) over $50 billion (a low amount by some estimates). Madoff’s embezzlement remains one of the biggest financial frauds in US history.

The fraud scheme was initially uncovered by a financial analyst named Harry Markopolos. Markopolos became suspicious because Madoff’s firm purported to achieve for its investors abnormally high rates of return for an extended period of time. After analyzing the investment returns, Markopolos reported the suspicious activity to the Securities and Exchange Commission (SEC), which has enforcement responsibility for firms providing investment services. While Madoff was initially able to stay a few steps ahead of the SEC, he was charged in 2009 and will spend the rest of his life in prison.

There are many resources to explore the Madoff scandal. You might be interested in reading the book, No One Would Listen: A True Financial Thriller , written by Harry Markopolos. A movie and a TV series have also been made about the Madoff scandal.

In addition to governmental and regulatory agencies at the federal level, many state and local agencies use financial information to accomplish the mission of protecting the public interest. The primary goals are to ensure the financial information is prepared according to the relevant rules or practices as well as to ensure funds are being used in an efficient and transparent manner. For example, local school district administrators should ensure that financial information is available to the residents and is presented in an unbiased manner. The residents want to know their tax dollars are not being wasted. Likewise, the school district administrators want to demonstrate they are using the funding in an efficient and effective manner. This helps ensure a good relationship with the community that fosters trust and support for the school system.

Depending on the perspective, the term customers can have different meanings. Consider for a moment a retail store that sells electronics. That business has customers that purchase its electronics. These customers are considered the end users of the product. The customers, knowingly or unknowingly, have a stake in the financial performance of the business. The customers benefit when the business is financially successful. Profitable businesses will continue to sell the products the customers want, maintain and improve the business facilities, provide employment for community members, and undertake many other activities that contribute to a vibrant and thriving community.

Businesses are also customers. In the example of the electronics store, the business purchases its products from other businesses, including the manufacturers of the electronics. Just as end-user customers have a vested interest in the financial success of the business, business customers also benefit from suppliers that have financial success. A supplier that is financially successful will help ensure the electronics will continue to be available to purchase and resell to the end-use customer, investments in emerging technologies will be made, and improvements in delivery and customer service will result. This, in turn, helps the retail electronics store remain cost competitive while being able to offer its customers a wide variety of products.

Managers and Other Employees

Employees have a strong interest in the financial performance of the organizations for which they work. At the most basic level, employees want to know their jobs will be secure so they can continue to be paid for their work. In addition, employees increase their value to the organization through their years of service, improving knowledge and skills, and accepting positions of increased responsibility. An organization that is financially successful is able to reward employees for that commitment to the organization through bonuses and increased pay.

In addition to promotional and compensation considerations, managers and others in the organization have the responsibility to make day-to-day and long-term (strategic) decisions for the organization. Understanding financial information is vital to making good organizational decisions.

Not all decisions, however, are based on strictly financial information. Recall that managers and other decision makers often use nonfinancial, or managerial, information. These decisions take into account other relevant factors that may not have an immediate and direct link to the financial reports. It is important to understand that sound organizational decisions are often (and should be) based on both financial and nonfinancial information.

In addition to exploring managerial accounting concepts, you will also learn some of the common techniques that are used to analyze the financial reports of businesses. Appendix A further explores these techniques and how stakeholders can use these techniques for making financial decisions.

IFRS CONNECTION

Introduction to international financial reporting standards (ifrs).

In the past fifty years, rapid advances in communications and technology have led the economy to become more global with companies buying, selling, and providing services to customers all over the world. This increase in globalization creates a greater need for users of financial information to be able to compare and evaluate global companies. Investors, creditors, and management may encounter a need to assess a company that operates outside of the United States.

For many years, the ability to compare financial statements and financial ratios of a company headquartered in the United States with a similar company headquartered in another country, such as Japan, was challenging, and only those educated in the accounting rules of both countries could easily handle the comparison. Discussions about creating a common set of international accounting standards that would apply to all publicly traded companies have been occurring since the 1950s and post–World War II economic growth, but only minimal progress was made. In 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) began working more closely together to create a common set of accounting rules. Since 2002, the two organizations have released many accounting standards that are identical or similar, and they continue to work toward unifying or aligning standards, thus improving financial statement comparability between countries.

Why create a common set of international standards? As previously mentioned, the global nature of business has increased the need for comparability across companies in different countries. Investors in the United States may want to choose between investing in a US-based company or one based in France. A US company may desire to buy out a company located in Brazil. A Mexican-based company may desire to borrow money from a bank in London. These types of activities require knowledge of financial statements. Prior to the creation of IFRS, most countries had their own form of generally accepted accounting principles (GAAP). This made it difficult for an investor in the United States to analyze or understand the financials of a France-based company or for a bank in London to know all of the nuances of financial statements from a Mexican company. Another reason common international rules are important is the need for similar reporting for similar business models. For example, Nestlé and the Hershey Company are in different countries yet have similar business models; the same applies to Daimler and Ford Motor Company . In these and other instances, despite the similar business models, for many years these companies reported their results differently because they were governed by different GAAP— Nestlé by French GAAP, Daimler by German GAAP, and both the Hershey Company and Ford Motor Company by US GAAP. Wouldn’t it make sense that these companies should report the results of their operations in a similar manner since their business models are similar? The globalization of the economy and the need for similar reporting across business models are just two of the reasons why the push for unified standards took a leap forward in the early twenty-first century.

Today, more than 120 countries have adopted all or most of IFRS or permit the use of IFRS for financial reporting. The United States, however, has not adopted IFRS as an acceptable method of GAAP for financial statement preparation and presentation purposes but has worked closely with the IASB. Thus, many US standards are very comparable to the international standards. Interestingly, the Securities and Exchange Commission (SEC) allows foreign companies that are traded on US exchanges to present their statements under IFRS rules without restating to US GAAP. This occurred in 2009 and was an important move by the SEC to show solidarity toward creating financial statement comparability across countries.

Throughout this text, “IFRS Connection” feature boxes will discuss the important similarities and most significant differences between reporting using US GAAP as created by FASB and IFRS as created by IASB. For now, know that it is important for anyone in business, not just accountants, to be aware of some of the primary similarities and differences between IFRS and US GAAP, because these differences can impact analysis and decision-making.

• 2 B. Wansink and J. Sobal. “Mindless Eating: The 200 Daily Food Decisions We Overlook.” 2007. Environment & Behavior , 39[1], 106–123.
• 3 U.S. Securities and Exchange Commission. “What We Do.” June 10, 2013. https://www.sec.gov/Article/whatwedo.html

Home / Essay Samples / Business / Management / Accounting

Accounting Essay Examples

An essay about accounting serves as a means to explore the principles, practices, and significance of accounting in the world of business and finance. The purpose of such an essay is to provide insights into how accounting functions as a vital tool for tracking financial transactions, making informed decisions, and ensuring the transparency and integrity of financial reporting. Essays on accounting shed light on the complexities and implications of this discipline, while also highlighting its role in shaping economic systems and business operations. Exploration of Accounting Principles in Accounting Essay Topics One of the primary goals of an essay about accounting is to delve into the fundamental principles that underlie accounting practices. This involves discussing concepts such as the accrual basis of accounting, the matching principle, revenue recognition, and more. Essays on this topic aim to explain how these principles guide financial reporting and decision-making. Essays about accounting often focus on the process of financial reporting, including the preparation of financial statements such as the balance sheet, income statement, and cash flow statement. These essays explore how accurate and transparent financial reporting is essential for stakeholders to assess a company’s financial health. Accounting plays a crucial role in aiding business decision-making. Essays in this field can discuss how financial data and reports help businesses evaluate profitability, assess risks, and make informed strategic decisions. These essays showcase how accounting information impacts various aspects of business operations. Tips for Writing an Essay About Accounting:

Choose a Focus: Select a specific aspect of accounting to explore, such as a particular principle, concept, or its role in a specific industry. Thesis Statement: Begin with a clear thesis that outlines the main topics or questions your essay will address. Explain Concepts: Ensure that you provide clear explanations of accounting concepts for readers who may not be familiar with the subject. Real-World Examples: Use real-world examples and case studies to illustrate the application of accounting principles. Consider Ethical Implications: Discuss the ethical considerations that accountants face, such as the importance of honesty and integrity in financial reporting. Address Current Trends: Explore how technological advancements are impacting the field of accounting, such as the use of AI and automation. Cite Sources: Properly cite sources to support your arguments and provide credibility to your essay.

An accounting essay provides a window into the intricate world of financial management and reporting. By analyzing principles, practices, and real-world applications, these essays contribute to a better understanding of the crucial role that accounting plays in shaping business decisions, financial transparency, and the overall health of economic systems.

Navigating Ethical Dilemmas in Accounting

The realm of accounting is not only about numbers; it is also a domain where ethical decisions hold significant weight. Accountants often find themselves facing ethical dilemmas that demand careful consideration and a deep understanding of professional responsibilities. This essay explores the complexities of ethical...

Report on Internship in the Field of Accounting and Finance

AMAC was formed in 2006. Head office is located in Federal-B Area Karachi. It is engaged in the services, supplies, distribution and marketing of petroleum & petrochemical products. It have expertise in fuel and lubricants industry. Being in the business since last ten years and...

Overview of Current Accounting Environment in Peru

Peru is an emerging economy, but still considered a developing country, which began to introduce the widely-used IFRS accounting standards during 1994. Prior to this introduction, the Peruvian system had become a hybrid of many other country’s accounting policies, taking influence over time from areas...

A Research Paper on Tesco 2014 Accounting Scandal

Within this paper I will be discussing the impact and causes of the 2014 Tesco accounting scandal and the challenges in which they faced after such huge event. In addition, this essay will describe the aftermath in which followed with an Analysis of the strategy...

Comparative Analysis of Computerised Accounting Software

Sage 50 is a computerised accounting software that is designed to assists firms when managing finances, overseeing the rate of sales, profits and expenditure that the business must go through. It is also useful for the analysis of business performances by using a variation of...

The Impact of Advancements in Technology on Accountants and Bookkeepers’ Job

Accounting is the process of recording financial transactions to help a company or a small business to keep records of their financial health. These reports support the company, help them manage their money better, and are used by every unit that is related to the...

The Use of Technology in Accounting: Accounting Software

Technology has always been revolving and improving as time pass by. Many things were emerging because of it. Life has been easy and people rely more to it ever since it flourished. The continuous growth of technology is not only evident in the everyday lives...

Being an Accountancy Student: Reflections on the Journey Thus Far

Reflecting on my journey as a fourth-year college student in an Accountancy program, I am reminded of the many risks and sacrifices I have made to reach this point. Throughout my college years, I have frequently evaluated my performance and reflected on how I arrived...

The Way Working Capital Management Works

Working capital is a proportion of corporate momentary money related status just as its proficiency. Working capital is touched base at by subtracting complete current resources with its all out current liabilities. In the event that the distinction in proportion between current resources and current...

Effect of Corporate Governance on Accounting Conservatism in Manufacturing Companies

The increased accounting scandals in the past previous years that caused subside of high reputable companies such as Enron have led several sectors to focus on amending accounting quality and corporate governance (Emmanuel & Salisu, 2018). Corporate governance is the system that is used to...

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