Primary Purpose of Accounting

For businesses, accounting is a way to track revenue and expenses and make predictions.

Accounting tracks financial information that businesses use for various purposes, including taxes, financial statements and budgeting. Accounting has both internal and external functions. Good accounting records are key to a company's ability to making predictions and planning for the future.

Decisions

Accounting is a system used to track a company’s financial transactions, including expenses and revenue. Accountants record financial transactions using a double-entry accounting system based on debits and credits. Periodically--at the end of each month, quarter or year, for example--totals are calculated. This information then is used in making decisions about the future needs and goals for the business.

Financial Statements

Transactions recorded in an accounting system are summarized in the form of financial statements. The three main types are the income statement, the balance sheet and the statement of owner’s equity. These financial statements are analyzed internally and externally by people who are interested in the business. The financial statements are compared monthly, perhaps quarterly as well as annually to determine how well the company is doing and what changes need to be made.

Budgets

Accountants analyze financial information and use it to create new budgets. Projected sales estimates and expenses are based on an examination of actual financial statements. An accountant also uses this information to pinpoint ways a company could save money, increase sales and reach a higher profit.

Stakeholders

Stakeholders are people who have an interest in the business. These includes owners, employees, stockholders, banks and investors. Stakeholders often analyze financial statements. For example, a bank uses financial statements to decide whether a business would be a good candidate for a loan. Investors use financial information in making decisions about whether to buy or sell a company's stock.

Taxes

Companies use accounting to determine what taxes they owe, including payroll, sales and income taxes. By keeping good accounts, a business can more easily calculate such tax payments.

References

• Quick MBA: Financial Accounting
• Accounting Coach: Introduction to Financial Accounting