{"id":853,"date":"2015-04-24T18:41:11","date_gmt":"2015-04-24T18:41:11","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterybusiness1xngcxmaster\/?post_type=chapter&p=853"},"modified":"2016-06-17T18:52:50","modified_gmt":"2016-06-17T18:52:50","slug":"reading-the-role-of-accounting","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/chapter\/reading-the-role-of-accounting\/","title":{"raw":"Reading: The Role of Accounting","rendered":"Reading: The Role of Accounting"},"content":{"raw":"

The Role of Accounting<\/h2>\r\n

Accounting is often called \u201cthe language of business.\u201d Why? Because it communicates<\/em> so much of the information that owners, managers, and investors need to evaluate a company\u2019s financial performance. These people are all stakeholders<\/span><\/span> in the business\u2014they\u00a0are interested in its activities because they\u00a0are affected by them. In fact, the purpose of accounting is to help stakeholders make better business decisions by providing them with financial information. Obviously, you would not try to run an organization or make investment decisions without accurate and timely financial information, and it\u00a0is the accountant who prepares this information. More importantly, accountants make sure that stakeholders understand the meaning<\/em> of financial information, and they work with both individuals and organizations to help them use financial information to deal with business problems.<\/p>\r\n

Actually, collecting all the numbers is the easy part\u2014today, all you have to do is start up your accounting software. The hard part is analyzing, interpreting, and communicating the information. Of course, you also have to present everything clearly while effectively interacting with people from every business discipline. In any case, we\u2019re now ready to define accounting<\/span><\/span> as the process of measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other decision makers.<\/p>\r\n\r\n

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Fields of Accounting<\/h2>\r\nAccountants typically work in one of two major fields. Management accountants<\/em> provide information and analysis to decision makers inside<\/em> the organization in order to help them run it. Financial accountants<\/em> furnish information to individuals and groups both inside and outside<\/em> the organization in order to help them assess its financial performance.\r\n\r\nIn other words, management accounting helps you keep your business running while financial accounting tells you how well you\u2019re running it.\r\n
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Management Accounting<\/h3>\r\n<\/div>\r\nManagement accounting plays a key role in helping managers carry out their responsibilities. Because the information that it provides is intended for use by people who perform a wide variety of jobs, the format for reporting information is flexible. Reports are tailored to the needs of individual managers, and the purpose of such reports is to supply relevant, accurate, timely information<\/em> in a format that will aid managers in making decisions. In preparing, analyzing, and communicating such information, accountants work with individuals from all the functional areas<\/em> of the organization\u2014human resources, operations, marketing, and finance.\r\n

Financial Accounting<\/h3>\r\nFinancial accounting is responsible for preparing the organization\u2019s financial statements\u2014including the income statement<\/em>, the statement of owner\u2019s equity<\/em>, the balance sheet<\/em>, and the statement of cash flows<\/em>\u2014that summarize a company\u2019s past performance and evaluate its current financial condition. In preparing financial statements, financial accountants adhere to a uniform set of rules called generally accepted accounting principles (GAAP)<\/span><\/span>\u2014the basic principles for financial reporting issued by an independent agency called the Financial Accounting Standards Board (FASB). Users want to be sure that financial statements have been prepared according to GAAP because they want to be sure that the information reported in them is accurate. They also know that they can compare the statements issued by one company to those of another company in the same industry.\r\n\r\nWhile companies headquartered in the United States follow U.S.-based GAAP, many companies located outside the United States follow a different set of accounting principles called International Financial Reporting Standards (IFRS)<\/span><\/span>. These multinational standards, which are issued by the International Accounting Standards Board (IASB), differ from U.S. GAAP in a number of important ways. IFRS, for example, is a little stricter about the ways you can calculate the costs of inventory, but we\u2019re not going to dwell unnecessarily on such fine distinctions. Bear in mind, however, that, according to most experts, a single set of worldwide standards will eventually emerge to govern the accounting practices of both U.S. and non-U.S. companies.\r\n\r\n<\/div>\r\n
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Who Uses Financial Accounting Information?<\/h2>\r\nThe users of managerial<\/em> accounting information are pretty easy to identify\u2014basically, they\u2019re a firm\u2019s managers<\/em>. We need to look a little more closely, however, at the users of financial<\/em> accounting information, and we also need to know a little more about what they do with the information that accountants provide them.\r\n
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Owners and Managers<\/h3>\r\nIn summarizing the outcomes of a company\u2019s financial activities over a specified period of time, financial statements are, in effect, report cards for owners and managers. They show, for example, whether the company did or didn\u2019t make a profit and furnish other information about the firm\u2019s financial condition. They also provide information that managers and owners can use in order to take corrective action.\r\n\r\n<\/div>\r\n
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Investors and Creditors<\/h3>\r\nIf you loaned money to a friend to start a business, wouldn\u2019t you want to know how the business was doing? Investors and creditors furnish the money that a company needs to operate, and not surprisingly, they feel the same way. Because they know that it\u2019s impossible to make smart investment and loan decisions without accurate reports on an organization\u2019s financial health, they study financial statements to assess a company\u2019s performance and to make decisions about continued investment.\r\n\r\n[caption id=\"attachment_5893\" align=\"alignright\" width=\"300\"]\"Warren Warren Buffet[\/caption]\r\n\r\nAccording to the world\u2019s most successful investor (and third-richest individual), Warren Buffett, the best way to prepare yourself to be an investor is to learn all the accounting you can. Buffett, chairman and CEO of Berkshire Hathaway, a company that invests in other companies, turned an original investment of $10,000 into a net worth of $35 billion in four decades, and he did it, in large part, by paying close attention to financial accounting reports.<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n
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Government Agencies<\/h3>\r\nBusinesses are required to furnish financial information to a number of government agencies. Publicly owned companies, for example\u2014the ones whose shares are traded on a stock exchange\u2014must provide annual financial reports to the Securities and Exchange Commission (SEC), a federal agency that regulates stock trades. Companies must also provide financial information to local, state, and federal taxing agencies, including the Internal Revenue Service.\r\n\r\n<\/div>\r\n
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Other Users<\/h3>\r\nA number of other external users have an interest in a company\u2019s financial statements. Suppliers, for example, need to know if the company to which they sell their goods is having trouble paying its bills or may even be at risk of going under. Employees and labor unions are interested because salaries and other forms of compensation are dependent on an employer\u2019s performance.\r\n\r\nFigure 1, \"Management and Financial Accounting,\" below, summarizes the main differences between the users of management and financial accounting and the types of information issued by accountants in the two areas.\r\n
\r\n\r\n[caption id=\"attachment_5894\" align=\"aligncenter\" width=\"800\"]\"Management<\/a> Figure 1. Management and Financial Accounting[\/caption]\r\n\r\n \r\n\r\n<\/div>\r\n
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KEY TAKEAWAYS<\/h3>\r\n