Accounting is the information system that measures business activity, processes the data into reports, and communicates the results to decision makers. Accountants produce financial statements to report on a business in monetary terms. Financial statements help decision makers answer financial questions such as whether a business is profitable, or whether a business should expand.
Decision Makers: The Users of Accounting Information
Individuals use accounting information to manage bank accounts, evaluate a new job, and decide whether they can afford a new car.
Business owners use accounting information to set financial goals, evaluate progress toward those goals and take corrective action if necessary.
Investors use accounting information to measure profitability of a business and decide whether to invest in it. They analyze the financial statements and keep up with the company. For financial information on public companies, go to the Internet sites such as finance.yahoo.com, www.hoovers.com (click on Companies), and the SEC's EDGAR database.
Creditors such as banks evaluate income statement and other financial statements of the debtor before lending money.
Local, state, and federal governments levy taxes. Income tax is figured using accounting information. Sales tax depends upon a company's sales.
Financial Accounting and Management Accounting
Accounting can be divided into financial accounting and management accounting. Financial accounting provides financial statements for outside investors and lenders who are not part of company management. Management accounting focuses on information for internal decision making by the company's managers.
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