12.1 The Role of Accounting

The purpose of accounting is to help stakeholdersParties who are interested in the activities of a business because they’re affected by them.—parties who are interested in the activities of the business because they’re affected by them—make better business decisions by providing them with financial information. AccountingSystem for measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other decision makers. consists of measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other decision makers. It’s impossible to run an organization or to make sound investment decisions without accurate, timely financial information; it’s the accountant who prepares this information. More important, accountants communicate the meaning of financial information and work with individuals and organizations to help them use financial information to deal with business problems. Getting numbers is the easy part of accounting, particularly since the introduction of the computer. The hard part is analyzing, interpreting, and communicating information—and doing so clearly while effectively interacting with people from all business disciplines.

Fields of Accounting

Accounting can be divided into two major fields. Management accountingBranch of accounting that provides information and analysis to decision makers inside the organization to help them operate the business. provides information and analysis to decision makers inside the organization to help them operate the business. Financial accountingBranch of accounting that furnishes information to individuals and groups both inside and outside the organization to help them assess the firm’s financial performance. furnishes information to individuals and groups both inside and outside the organization to help them assess the firm’s financial performance. In other words, management accounting helps you keep the business running while financial accounting tells you how you’re doing in the race.

Let’s look a little more closely at each of these two fields.

Management Accounting

Management accounting plays a major role in helping managers carry out their responsibilities. Because the information that it provides is intended for company-wide use, the format for reporting it is flexible. Reports are tailored to the needs of individual managers, and their function is to supply relevant, accurate, timely information in a format that will aid managers in making decisions. In preparing, analyzing, and communicating such information, accountants work with individuals from all functional areas of an organization.

Financial Accounting

Figure 12.2

Financial statements provide a snapshot of a company’s performance over a specific period.

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Accountants prepare the financial statementsFinancial reports—including the income statement, the balance sheet, and the statement of cash flows—that summarize a company’s past performance and evaluate its financial health.—including the income statement, the balance sheet, and the statement of cash flows—that summarize a company’s past performance and evaluate its financial condition. In preparing financial statements, they adhere to a uniform set of rules called generally accepted accounting principles (GAAP)Uniform set of rules for financial reporting established by an independent agency called the Financial Accounting Standards Board (FASB).: principles for financial reporting that are established by an independent agency called the Financial Accounting Standards Board (FASB). Knowing that financial statements have been prepared according to GAAP assures users that reported information is accurate. They’re also confident that they can compare statements from one company to those of another in the same industry. (We’ll examine financial statements much more closely later in the chapter.)