For a business to properly function, effective methods of communication among owners, managers and investors are essential. Accounting fills the need for a common language of business. It records and processes financial information into an easily accessible format that can be understood by any person in the business world.
Basics of Accounting
There are two main branches of accounting that businesses engage in to carry out business functions: managerial and financial. Managerial accounting is used to compile reports on company activities within the organization for managers, while financial accounting is used to processes information and prepare it for external parties such as investors and shareholders. In essence, accounting serves to record and organize all the financial transactions of an organization.
Applications of Accounting in Business
Accounting is critical for the effective management of a business, as it allows the quantification of business processes and transactions. By quantifying this information, businesses are able to set and create goals for the company to achieve. This function is necessary, as without a method of measuring such data, businesses would be unable to determine whether their operations are profitable or whether organizational goals are being met. With such information, managers are able to make decisions based on the financial indicators and adjust business processes to reflect this data.
Accounting as a Means of Communication
Accounting allows various departments within an organization to effectively communicate among each other, as well as with external parties. By transforming raw financial data into a format that indicates an organization's financial performance in a number of areas, managers are able to determine whether the business is operating properly and develop plans of action if the business is not meeting company goals. Through this language and format, departments are able to coordinate their efforts and cohesively act as an organization.
Accounting and Standardization
Accounting standardizes the means of communication among both internal and external parties within the business world. As all businesses conform to standardized accounting practices, investors, shareholders and other external parties are able to easily evaluate business activities without specialized knowledge of a firm's accounting practices. This simplifies business transactions, as all parties use the same definitions and methods of calculation to determine their financial indicators.
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