Text 3 What is Accounting?

Accounting has been called «the language of business». Per­haps a better term is «the language of financial decisions». The better you understand the language, the better you can manage the financial aspects of living. Personal financial planning, in­vestments, loans, car payments, income taxes, and many other aspects of daily life are based on accounting. A recent survey in­dicates that business managers believe it is more important for college students to learn accounting than any other subject. Other surveys show that persons trained in accounting and fi­nance make it to the top of their organizations in greater num­bers than persons trained in any other field. Indeed, accounting is an important subject.

Accounting is the system that measures business activities, processes that information into reports and communicates these findings to decision makers. Financial statements are the docu­ments that report on an individual's or an organization's business in monetary amounts.

Is our business making a profit? Should we start up a new line of women's clothing? Are sales strong enough to warrant opening a new branch outlet? The most intelligent answers to business questions like these use accounting information. Decision makers use the information to develop sound business plans. As new programs affect the business's activities, accounting takes the com­pany's financial pulse beat. The cycle continues as the accounting system measures the results of activities and reports the results to decision makers.

Bookkeeping is a procedural element of accounting as arithmetic is a procedural element of mathematics. Increasingly, people are using computers to do much of the detailed bookkeeping work at all levels — in households, business, and organizations of all types.

Users of Accounting Information

Individuals. People use accounting information in day-to-day affairs to manage their bank accounts, to evaluate job prospects, to make investments, and to decide whether to rent or to buy a house.

Businesses. Managers of businesses use accounting information to set goals for their organizations, to evaluate their progress toward those goals, and to take corrective action if necessary. Decisions based on accounting information may include which building and equipment to purchase, how much merchandise inventory to keep on hand, and how much cash to borrow.

Investors and Creditors. Investors provide the money that businesses need to begin operations. To decide whether to help start a new venture, potential investors evaluate what income they can reasonably expect on their investment. This means analyzing the financial statements of the new business. Those people who do invest monitor the progress of the business by analyzing the com­pany's financial statements and by keeping up with its develop­ments in the business press, for example, The Wall Street Journal, Business Week, Forbes, and Fortune.

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