The Role of Accounting in Business

Key Takeaways

• Accounting is a system for measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other stakeholders to help them make better business decisions.

• Accounting can be divided into two major fields:
  • Management accounting provides information and analysis to decision makers inside the organization (such as owners and managers) to help them operate the business.

  • Financial accounting provides information not only to internal managers, but also to people outside the organization (such as investors, creditors, government agencies, suppliers, employees, and labor unions) to assist them in assessing a firm's financial performance.

• U.S. and non-U.S. companies follow different sets of standards in preparing financial accounting reports:
  • U.S. companies adhere to a uniform set of rules called generally accepted accounting principles (GAAP), which are issued by an independent agency called the Financial Accounting Standards Board (FASB).

  • Many companies outside the United States follow a set of accounting principles called International Financial Reporting Standards (IFRS), which are issued by the International Accounting Standards Board (IASB).

• Experts expect that a single set of worldwide accounting standards will eventually emerge and be followed by both U.S. and non-U.S. companies.