Accounting – an integral part of business
Accounting, as an integral part of business, helps business in the following four areas:
- As an information system, accounting provides relevant financial information as inputs to external users group (creditors, shareholders, customers and so on) for making the right decision in the right time.
- As a language of business, accounting communicates operating performance (bet profit or net loss) and financial position (assets and obligations) meaningfully to the interested user the essence of information depends greatly on how it is communicated to the users.
- As a tool of external reporting, accounting ensures internal control over operations inside business. Accounting helps management look back (control). External reporting also facilitates efficient use of scarce resources and their proper allocation among the involving parties.
- Finally, as a means of accountability management (stewards of resources) of public limited companies can discharge its accountability to the shareholders (owners of resources) providing an annual report (including financial affairs)
Now, let’s see how accounting plays a crucial role in business:
Mr. Anderson is a business graduate and successfully completed his B.B.A from a reputed University. He is energetic and full of ideas. He took a job in a software firm at a monthly salary of $3000. After having job experience of four years, he decided to start his own business. He left the job and started a new software firm of his own. He appointed a manager and five stuff for his business. Hot surprisingly, Anderson succeeded in his own Business. He kept all accounting record informally in a note book. After doing business for two years, he found that his total revenue from revenue from software sale and service is around USD $1 Lac, Anderson Planned to expand his business in hard ware side, Accordingly, he applied for a loan of $ 5 lac to a a commercial bank. But unfortunately he could not place financial statements and financial information to the bank. The bank could not assess his business condition on the basis of informal records. the bank didn’t sanction the loan and his expansion plan was simply buried! He then hired a chartered Accountant to reconstruct the accounting records and create financial statement to show how to business had performed and where it stood financially.
Adapted from Horngren, Charles T. Harrison, Accounting, Walter H. Prentice Hall (1992), Engle wood cliffs, New Jersey