Accounting relationship to other fields

Individuals engaged in such areas of business as production, marketing, personnel, and general management need not be expert accountants, but their usefulness is enhanced and their advancements is more assured if they have a good understanding of accounting principles. Everyone engaged in business activity, form the workman to the manager and owner, comes into contact with accounting. The higher the level of authority and responsibility, the greater is the need for an understanding of accounting concepts and terminology.

Many other person with specialized training in non-business areas who are employed by business organizations also make use of accounting data and need to understand accounting principles. For example, an engineer responsibility for selecting the most desirable solution to a technical manufacturing problem may consider cost accounting data to be the decisive factor. Lawyers use accounting data in cases and in lawsuits involving property ownership and damages from breach of contract. Government agencies rely on accounting data in evaluating the efficiency of government operations and for appraising the feasibility of proposed taxation and spending programs. Finally, every person engages in business transactions and must necessarily be concerned with the financial aspects of his own life, and perhaps of others. Accounting plays an important role in modern society and, broadly speaking, it can be said that all citizens, are affected by accounting. The closer the contact with financial activity, of course, the greater the need for an understanding of an accounting concepts and terminology.

Accounting Need

Accounting is the “language” employed to communicate financial information. Such information is sought for a variety of reasons. Owners and prospective owners of a business enterprise need to know about its financial status and its prospects for the future. Bankers and suppliers appraise the financial soundness of a business organization and weigh the risk involved before making loans, or granting credit. Government agencies are concerned with the financial activities of business organizations for purposes of taxations and regulation. Employees are also vitally interested in the stability and the profitability of the organization that employs them.

The managers of business enterprises need a wide range of data about every fact of operations, much of which is made available through accounting. The manager of a small business may be thoroughly familiar with all operating and financial details and hence need relatively little accounting information. As the size of a business unit increase, however, the manager becomes farther and farther removed from direct contact with day-t-day operations. He business, be must be supplied with timely financial information about various aspects of the business. The growth of large business units and of the importance of accounting in such organizations has given rise to the expression that accounting provides the “eyes and ears of management”.

The accountant has the responsibility of keeping track of all monetary transactions that affect the organization of interpreting the information in terms of relative success or failure, and of helping to plan the course of future action.

What is accounting

Accounting is often characterized as “the language of business”. Because of the wide range of accounting activity, as concise yet all-inclusive description of accounting is difficult to devise. Accounting is concerned with processes of recording, sorting, and summarizing data resulting from business transactions and events. The data are to a large extent but not exclusively of a financial nature, and are frequently but not always stated in monetary terms. Accounting is more than this, however, its involvement with preparation of reports and interpretation of the data is of often grater significance. Accounting has been defined rather broadly as:

            …the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.

Implicit in this definition is the necessity of recording the economic information that is to be measured. An understanding of the kinds of information to be accounted for and their manner of recording must be acquired before the student can advance very far into the area of effective communication.

Without exploring in detail the characteristics of economic information, it is sufficient at this point to indicate that it includes financial information about business transaction. Much of the “raw-material” with which accounting deals is composed of business transaction data, expressed in terms of money. The recording of such data may take various forms, such as writing by pen or pencil, printing by various mechanical and electronic devices, or holes or magnetic impressions in cards or tape.

The mere records of transactions are of little use in making “informed judgments and decisions”. The recorded data must be sorted and summarized before significant reports and analyses can be prepared. It is not the single business act but the sum of all the operations of a day, week, month or year that has significance. Some of the reports to enterprise managers and to others issued only at longer intervals. The usefulness of reports is often enhanced by analyses, such as percentages and ratios, and comparisons between different dates or periods of time. The trends and other significant developments in the affairs of an organization set forth in various reports are, in a general sense the “end-product” of accounting.