Accounting is the act of reporting financial information. Global economic systems rely on accounting to provide reliable, transparent, and accurate financial reporting — the language of business.
Basics
Crucially, accounting doesn’t interpret results. Its objective is to identify, measure, and communicate financial information about economic entities to interested parties. We can broadly divide interested parties between internal and external users:
- Internal users are within the company itself. They can include upper management, human resources, marketing, and production (among others). Those who have access to accounting information within the company to help run it are considered internal users.
- For example, human resources may think about how many employees they can afford to hire, or how many raises they can negotiate.
- Production may think about which product line is the most profitable, or whether they should contract out production.
- Financial teams may think about whether there’s enough cash to pay the bills or whether they need to borrow.
- External users are mostly those outside the company using accounting information that is available to the general public.
- Investors are interested in whether they’ll get a good return on investment, i.e., what’s the opportunity cost of investing in one company versus another?
- Creditors (or lenders) are similarly interested in opportunity cost and their capital costs. Will the company be able to pay their debts when necessary?
- Employees may get a smaller raise if the income is understated.
Discrepancies in financial reporting is important if they have some material impact. The main objective is to provide information that’s useful to users and decision-relevant. Accounting information is mainly presented in financial statements.
Accounting is bound to financial reporting standards that avoid the role of management bias in reporting, and essentially build a level playing ground for all companies to report.
Conceptual frameworks are also important. They guide the management’s decisions on what to present in financial statements, and increases financial statement users’ understanding and confidence in financial reporting. It also enhances comparability of financial statements of different companies.
Sub-pages
- Financial reporting standards
- Business activity
- Financial statement
- Accounting qualitative characteristics
- Accounting assumptions