Need of Financial Accounting

Accounting’s Importance to Business

So why do we need accounting? Asking that question of an accountant is like asking a farmer why we need rain. We need accounting because it’s the only way for business to grow and flourish. Accounting is the backbone of the business financial world. After all, accounting was created in response to the development of trade and commerce during the medieval times.

Italy is our first recorded source for accounting entries, and the first published accounting work in 1494 was by a Venetian monk. So you see accounting as an organized method for record-keeping has been around almost as long as the trade and business industries. Another interesting fact is the knowledge and principles upon which the first accounting practices were established, have changed very little in the many hundreds of years that accounting has been in use. The concepts of assets, liabilities, and income and the need to reconcile these areas is still the basis for all accounting functions today.

The process for recording those transactions, and the many reports generated by the compilation of that information has evolved over the last two hundred years. Thanks to the creation of computers, many of the bookkeeping functions that are vital to accounting, but somewhat repetitive are performed by data entry clerks, and the reports generated come from the IS Department. The end result is still the same: accounting gives us the financial snapshot we need in order to make solid business decisions about the current status or projected future health of our businesses.

There are two basic categories of accounting: financial accounting and managerial accounting. Financial accounting is comprised of information that companies make available to the general public: stockholders, creditors, customers, suppliers, and regulatory commissions. Managerial accounting deals with information that is not made public. Information such as salary costs, Cost of goods produced, profit targets, and material control information. The knowledge supplied by managerial accounting is for the use of department heads, division managers, and supervisors to help them make better decisions about the day-to-day operations of the business.

Now, what about the “accountability” part of the accounting process? Why do we need that and how do we enforce it? Businesses need to be held accountable for the methods they use to run a business because the potential for greed, theft, and dishonesty exist in every business. You have only to read the current events section of the newspaper to realize how rampant corporate abuse is in business today. We have Enron, HealthSouth, and Martha Stewart examples to show us just how extensive the problem has become. There are specialized areas of accounting, that when correctly enforced, eliminate the possibility for fraud. Auditing and income taxation, when used correctly, force business to account for all business income, transactions, and transfers, and then to pay their fair share of the tax burden. The catch here is that the principles must be correctly enforced.

Accounting is the conscious of the business world. When handled with care and with respect, it performs as expected. When abuse occurs, and the system is circumvented or overridden because of dishonesty and greed, it doesn’t work correctly. Accounting is much like all other systems in place, they are only as good as the people using them.