Understanding the Integral Role of Accounting in Business Decisions

1.1 Role of accounting

Accounting is a system for measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other stakeholders to help them make better business decisions.

Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization. Internal users (Primary Users) of accounting information include management, employees and owners. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. Yet the external users (Secondary Users) of accounting information include creditors, tax authorities, investors

A business uses accounting to determine operational plans in the future, to review past performance and to check current business functions. Management and financial accounting have different audiences, as investors are not usually involved in the day-to-day operations of the business but are concerned about their investment, whereas managers need information quickly to make daily business decisions. Financial accounting produces information that is used by external parties, such as shareholders and lenders yet management accounting produces information that is used within an organization, by managers and employees. The main objectives of financial accounting are to disclose the end results of the business, and the financial condition of the business on a particular date. The main objective of management accounting is to help management by providing information that is used to plan, set goals and evaluate these goals. Besides that, financial accounting is legally required to prepare financial accounting reports and share them with investors and management accounting reports are not legally required. In addition, financial accounting is more focuses on history and reports on the prior quarter or year however management accounting focuses on the present and forecasts for the future. Financial accountings are reported in a specific format, so that different organizations can be easily compared. Format of management accounting is informal and is on a department or company basis as needed. The reporting frequency for financial accounting is either annually, semi-annually, quarterly or yearly and for management accounting is daily, weekly or