Accounting is the entire process of recording and summarizing the business transactions, reporting accounting information, analyzing and interpreting accounting reports to help those interested parties such as managers, investors, bankers and creditors to make important business decisions. The final product of accounting is a set of financial statements comprising at least Balance Sheet and Profit & Loss Statement. These statements are useful to different users for different reasons. Accounting may be divided into financial accounting and management accounting.
Financial accounting is the field of accounting that provides financial information for potential investors, creditors and other ...view middle of the document...
Lenders such as banks and potential creditors can use the information to assess the credit worthiness of the entity and its ability to pay interest and repay the amount borrowed in the future.
Suppliers and other trade creditors need information that enables them to determine whether the business is able to fulfil its financial responsibilities for goods sold on credit and ability to pay the amounts owed to them when due. Trade creditors are likely to be interested in an entity over a shorter period than lenders unless they are dependent upon the continuation of the entity as a major customer.
Customers have an interest in information about the financial health of the business as they want to see that the business will remain viable and continue in operation at least throughout the period of their business relationship with the company. Some customers may only be concerned with the immediate liquidity of the business where the relationship is one-off or short term.
Governments and their agencies need information in order to regulate the activities of entities, to assess whether they comply with agreed pricing policies, whether financial support is needed, and the amount of taxes payable by the business. They also require information in order to determine taxation policies and as the basis for national income and statistics as well as for formulating social and economic policies and planning.
Members of the public are affected by entities in a variety of ways. For example, entities may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the entity and the range of its activities.
Investments analysts need financial information relating to an entity to assess the likely risks and returns associated with the entity in order to determine its investment potential and to advise clients accordingly.
Competitors need financial information relating to an entity to assess the threat to sales and profits posed by those businesses and to provide...