Modern accounting is widely recognized as a basic component of business management. Accounting is the means by which managers are informed of the financial status and progress of their companies, thus contributing to the continuing processes of planning, control of operations, and decision making. Accounting provides a method of systematically recording and evaluating business activities. This is, perhaps, the fundamental reason for business managers and business students to familiarize themselves with the accounting discipline.

A large portion of the information that a business manager requires is derived from accounting data. The ability to analyze and use these data helps managers accomplish their objectives. Through your study of accounting, you will discover the types of business activities that can be accounted for usefully, the methods used to collect accounting data, and the implications of the resulting information. Furthermore and often just as important you will become aware of the limitations of accounting reports.

ACCOUNTING AS AN INFORMANTION SYSTEM

Virtually all profit seeking organizations and most nonprofit organizations maintain extensive accounting records. One reason is that these records are often required by law. A more basic reason is that, even in a very small organization, a manager is confronted with a multitude of complex variables. Not even the most brilliant manager can be sufficiently informed just by observing daily operations. Instead, he or she must depend on the accounting process to concert business transactions into useful statistical data that can be abstracted and summarized in accounting reports. In every sense, this process is essential to the coordinated and rational management of most organizations regardless of their size. Thus, accounting is an information system necessitated by the great complexity of modern business.

In today’s society, many persons and agencies outside of management are involved in the economic life of an organization. These persons frequently require financial data. For example, stockholders must have financial information in order to measure management’s performance and to evaluate their own holdings. Potential investors need financial data in order to compare prospective investments. Creditors must consider the financial strength of an organization before permitting it to borrow funds. Also, labor unions, financial analysts, and economists often expect a considerable amount of reliable financial data. Finally, many laws require that extensive financial information be reported to the various levels of government. As an information system, the accounting process serves persons both inside and outside an organization.