When it comes to the definition of accounting, it is often described as identification, measurement and consequent communication of economic information that enables its users to make knowledgeable decisions. This information concerns finances and, therefore, is presented in monetary terms. Thus, according to Learn Basic Accounting Easy (2014), accounting is a process used to provide financial data on the activities of profit-seeking businesses and non-profit organizations. For instance, bank officials can review a company’s financial records to assess its ability to redeem a loan. Potential investors might want to compare the accounting data of a handful of companies to determine which one suggests the best investment. Additionally, business owners use this information to create budgets for their organizations.
Basic accounting principles can teach one the so-called ‘language of business’ – that is, concepts and terms which have been adopted and are widely used in the business world. If one understands the guidelines of accounting information being prepared, it puts them in an advantageous position when facing a situation of making an important decision. Moreover, there are peculiarities in presenting such data too: as per AccountingWITT (2010), among those who might want to hear the story of a business are internal users, external users, and the government. Even though the data presented to all these parties is the same, one is to use different approaches when delivering it to each of them. Managerial accounting is the language with which information is to be conveyed to internal users, whereas for external ones, financial accounting is the appropriate way; with the government, one is to resort to tax accounting. Understanding that makes one a more competent manager and makes it easier to work with them.
It is evident that reliable information is essential in enabling those in charge to make appropriate decisions – and having access to such information is the key. This is precisely why accounting is so important – it is the tool to provide one with all the data necessary to move in the right direction when it comes to business-making. It is used to assess the financial implications of various alternatives and soundly allocate resources. Accountants are able to measure the future: uncertainty is reduced with the use of professional judgment to quantify implications of taking or postponing action. Dunn (2011) states that it confers them with great power as well as with great responsibility: their mistakes might be more crucial than mistakes of other specialists. It can lead a business or an organization to failure recovering from which might be difficult.
Businesses can have many goals and objectives. For instance, a goal of a restaurant’s owner may be the improvement of the building’s physical form. However, the main objectives of each enterprise are profitability and solvency. Profitability is the ability of income generation, whereas solvency is the ability of well-timed debt payment. Unless an enterprise can generate a sufficient income and pay debts until they expire, it will not be able to survive to achieve its other goals (Learn Basic Accounting Easy, 2014). These concepts are reflected in the accounting equation, which embodies the structure of the corporate financial statements.
Corporate financial statements are written records conveying the company’s strength and profitability. According to Dunn (2011), there are four main corporate financial statements. The income statement is the one reflecting the organization’s profitability. The statement of retained earnings presents a change in such earnings over a particular period (for example, month or year). The balance sheet discloses the financial position and solvency of the company. Finally, the statement of cash flows encapsulates the organization’s cash flow and outflow over a certain time period.
References
AccountingWITT. (2010). What is accounting? [Video]. YouTube. Web.
Dunn, K. (2011). Introduction to Accounting I: An intuitive approach [Video]. YouTube. Web.
Learn Basic Accounting Easy. (2014). Purpose of accounting [Video]. YouTube. Web.