The role of Accounting in Business
Accounting refers to the process of summarizing recording and analyzing a financial transaction. Accounting plays an essential role in various aspects of the business. Some of the areas where accounting is applied involve internal management of the company, compliance with government regulations, and business operations planning.
Management of internal affairs of the business applies accounting procedures in which reports are generated to guide business decisions. Managers within the company utilize the accounting reports in a way that such statements guide their objectives. Accounting statements provide an avenue in which bases of paying tax and filing returns are enhanced; thus, compliances with the government regulations are promoted—planning of business operation dependents on the information derived from the accounting reports. Hence accounting plays a crucial role in determining the purchases to make and prediction of future market trends.
One group that benefits from the accounting information is the investors. Investors apply accounting information to predict and estimate the futures expected return. With such information, they can analyze and evaluate the risk associated with such ventures. Therefore, investors using accounting information can allocate reasonable resources to their, enterprises hence preventing them from making unwanted losses.
In a business set up, there exist financial statements that are used to show the financial position of the company, which are; income statement, balance sheet, statements of cash flows, and retained earnings. The income statements provide information about the expenses, revenues, and profit/losses in a financial year. The balance sheet presents information related to assets, liabilities, and equity reported in a particular, fiscal year. Information about cash inflow and cash outflow is shown in the statements of cash flow. Finally, the statement of retained profit presents information based on the change of equity in a given financial year. The four financial statements interact in such a way that some items may coincide in some of the financial statements. For instance, net income may be present in the income statement and also in the cashflow. Calculations of financial statements for retained earnings depend on completion of the income statement’s computation as items such as net income are added to the retained earnings once recorded in the income statement.