The Important Functional Area of Accounting

This is a new chapter covering the important functional area of accounting, this chapter will first define accounting discuss how managers and other stakeholders use financial information, it will introduce the three financial statements in accounting namely the balance sheet, the income statement and the cash flow statement which is the third.

Finally this chapter will talk about ratio analysis and identify the major categories of financial ratios

It is vital for any organization to have accurate update accounting informations, the introduction of the chapter will explain what accountants do, what are the rules they are expecting to follow, this chapter will explain you the fundamental concepts of the accounting equation and of double entry bookkeeping.

Learning objectives ;

Segment 1 ; Understanding accounting

Accounting is the system that a business uses to identify measures and communicate financial information to others inside and outside the organization.
Two main reason why it is vital (having these accurate informations) ;

• It helps managers and owners both planned and control company financial operations. It helps them make informed business decisions
• It helps outsiders evaluate a business, these outsiders can be different person, like suppliers, banks or any other lenders, they want to know if the business is « credit worthy » if it worths a credit. It can be as well investors and chairholders to evaluate the profit potential of the business. But among these outsiders there is as well all the government agencies that are interested in tax accounting of the business. Because they levy tax on the business.

That’s why accounting has two facets ;

• Financial accounting (first facet)
• Management accounting (second facet)

About Financial accounting ; it is concerned with preparing financial statements and preparing any other informations for outsiders.
About Management accounting : it is concerned preparing cost analysis, profitability reports, budget, and any other informations for insiders (such as any decision-maker)