Describing the Role of Accounting in Business

                      Describing the role of accounting in business

  In every business, accounting plays a critical role. Business in a simple interpretation is generating revenue to make profit. Stakeholders are using financial statement to analyze the business potential and make business decisions. Financial statement is the summary of accounting or we can say it is the expression of accounting. So what is accounting? Accounting can be defined as an information system which is a recording and classification of the data of every transition of the business. According to that definition of the accounting, it shows that accounting is the primary information by business to communicate with the stakeholders. Being this function, accounting can be considered being engaged in two main roles in the business.

  One of the roles is preparing the papers of summarize the financial performance of business to external stakeholders. For the business, external stakeholders can be listed such as banks, shareholders, suppliers, governmental agencies, etc. This is called financial accounting. Financial accounting can help the external stakeholders to understand the business condition. In addition, if the company is listed company, the financial accounting is also required by the market or Security and Exchange Commission. Therefore, the financial accounting has to achieve accuracy. Furthermore, to follow the law and the accounting rules is another essential condition of financial accounting. If a violation of the accounting rules was found, the business would be affected directly. The book “ Survey of Accounting” gives us one of the example about the company called Xerox. In their financial accounting, $3 billion in revenue was recognized in periods earlier than should have been recognized. For this fraud the company was fined $10 million by the Security and Exchange Commission.  

  Furthermore, in financial accounting there are two major reports based on different time periods. One is the report of financial conditions at a point of time. The other one is the report of changes of financial conditions over a period. The two reports from different dimensions give two different ways to interpret the business.

  Another main role of the accounting is provide the financial information to managers. This is called managerial accounting. This branch of accounting can help the managers to operate the business. All companies engage in three business activities. They are financing activities, investing activities and operating activities. The managerial accounting provides the financial information, helping the management to make business decision in these three activities. Because it is inside company financial information, the main function is guiding the business decision for the management, so the company may create new accounting concepts for better interpretation of their own business. For instance, some fashion companies make an inventory accounting during the season and after the season. Because the different characteristics of every business, the managerial accounting can be tailor made for the individual business.