Understanding Accounting and its Role in the Business World

Posted on by LBS Tax

There are times when people mistake accounting with bookkeeping. The latter refers to the process of capturing business transactions and entering them into books of accounts. As for the former, this is where the information captured is analyzed and used in making decisions. For you to become an accountant, you must have studied, sat for and passed professional exams. These are usually administered by a recognized board. On the other hand, you are also supposed to study accounting at the degree level. Broadly speaking, accounting is categorized into financial, management and cost accounting.

Financial accounting deals with the process of preparing statements that will be used by banks, creditors and stockholders. You note that these are outsiders but with an interest in the activities of a business organization. The statements are of a financial nature that usually show how much profit or loss has been made by the entity in question. Financial accounting also shows the position of a business with respect to a particular date. An investor can also use these statements to tell whether the business is worth pursuing or not; and also facilitate the computation of tax.

As suggested by the name, management accounting involves reproducing the accounts created above, that is, those accounts generated under the financial accounting process. The accounts are made in such a way that business managers can make decisions on how to forge ahead. Cost accounting on the other hand, deals with ascertaining the amount spent in generating the finished product. This is important as the management will ascertain whether cost of production is too high or low. Initial costs incurred have a bearing on profit. This branch of accounting helps keep such matters in check.

Majorly, accounting helps in keeping track of every transaction. After recording, some adjustments are made as per the accounting policies and concepts. In the end, the people interested in a particular company’s affairs get to know how it is faring. In addition, accounting helps protect the property owned by a business since many people would love to take advantage of business assets in order to benefit themselves. Accountants apply what is known as internal control mechanisms to safeguard business property from misuse. The law requires that businesses keep certain records. It is through accounting that these records come into being.

Finally, accounting helps communicate the happenings in the business to people with an interest in it. You can authoritatively call accounting the language with which a business speaks. If you have bought a company’s stock or sold goods to the company on credit, you would be interested to know more. In case of a profit, you are assured of some returns and if the business is not doing well, you can stop the credit facilities you have been offering. Businesses borrow money from banks thus makes the concerned financial institution an interested party. With this information, you can now appreciate the role played by accountants in the business world. You have also understood accounting in its true sense.

|

Share:

Share
Tumblr
Pin it

Schedule Your Free Tax Consultation (480) 664-1249