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.

The Development of Accounting Thought

Accounting has a long history. Some scholars claim that writing arose in order to record accounting information. Account records date back to the ancient civilizations of China, Babylonia, Greece, and Egypt. The rulers of these civilizations used accounting to keep track of the cost of labour and materials used in building structures like the great pyramids.

Accounting developed further as a result of the information needs of merchants in the city-states of Italy during the 1400s. In that commercial climate the monk Luca Pacioli, a mathematician and friend of Leonardo da Vinci, published the first known description of double-entry bookkeeping in 1494.

The pace of accounting development increased during the Industrial Revolution as the economies of developed countries began to mass-produce goods. Until that time, merchandise had been priced based on managers hunches about cost, but increased competition required merchants to adopt more sophisticated accounting systems.

In the nineteenth century, the growth of corporations, especially those in the railroad and steel industries, spurred the development of accounting. Corporation owners — the stockholders — were no longer necessarily the managers of their business. Managers had to create accounting systems to report to the owners how well their businesses were doing.

The role of government has led to still more accounting developments. When the federal government started the income tax, accounting supplied the concept of "income". Also, government at all levels has assumed expanded roles in health, education, labour, and economic planning. To ensure that the information that it uses to make decisions is reliable, the government has required strict accountability in the business community.

Financial management: basic aspects

An effective financial manager must be capable of operating within the existing macroeconomic and legal environment. The financial manager must plan, manage assets and obtain funds in a market economy that is made more complex because of cycles in business activity leading to fluctuations affecting the production of goods and services, inventories, profits, and cash flows. Therefore, the business firm must be able to adjust to changes in the macroeconomy.

A financial manager must also operate within the legal environment characteristic of the business firm. The firm must be organized as a proprietorship, a partnership, or a corporation. The form of organization selected will influence such matters as the ability to obtain funds the payment of earnings to owners, and the risk borne by owners. Let us examine the legal characteristics of the major forms of business.

The sole proprietorship is a firm owned by a single person, who holds title to all of the assets and is responsible for the liabilities. The owner receives the profits or suffers the losses incurred in operations.

The partnership differs from the proprietorship chiefly in that there is more than one owner. The most common form of partnership is the general partnership, under which all partners are liable for the debts of the business. A limited partnership is a partnership which must have at least one general partner who has all the rights and responsibilities of the general partners described above. The liability of the other partners, who are called limited partners, for losses and debts is restricted to the amount of his/her original contributions.

A corporation is a creation of law. It is a legal entity that has the right to own property, to contract debts, and to engage in certain activities. The corporation is a remarkable device that permits a group of people to act and be treated as a single person. Since a corporation has a legal existence separate from its owners, the owners have limited liability.