The imporance of accounting theory to

One party has an information advantage over another party One party can observe the actions while the other party cannot Hidden information from the past and present Hidden future action Example: In an ideal world, the economy would be characterized by perfect markets with a lack of information asymmetry.

The imporance of accounting theory to

Why Management Accounting Is Important in Decision-Making |

Share on Facebook Financial accounting, which some call "the language of business," is important to companies of any size. For small-business owners, the importance of financial accounting sometimes is overlooked.

By understanding how useful financial accounting can be to the success of a small business, you can focus on the qualities that can take your business the furthest. Recording Transactions A major use of financial accounting is for the recording of transactions.

This function of accounting is also known as bookkeeping. Small-business owners use financial accounting to record business activity in the company's ledger.

Because financial accounting uses the double-entry system, each transaction affects two accounts, representing the two sides to a transaction.

The imporance of accounting theory to

For example, if a business owner purchases land for cash, he would record a debit to the land account to represent the receipt of land, and a credit to the cash account to represent the outflow of cash.

This use of accounting is important to small-business owners because it provides a methodological approach to describing the activities of business. Communicating Information Externally Small-business owners use financial accounting to communicate information to external parties.

People and organizations that use the financial information of a company, but are not part of the company, are known as external users of financial statements. Owners communicate the financial health and well-being of a company to external users through the financial statements, which are the end result of recording financial accounting transactions.

External users will examine the financial statements and compare the results to their own expectations, forming an assessment of the company. Common external users include banks, suppliers and leasing companies.

Communicating Information Internally While managerial accounting is more geared towards internal users, financial accounting is also used for internal information communication. Internal users of financial accounting information include the finance team and employees who may be interested in profit-sharing or stock-based compensation agreements.

Small-business owners can use financial accounting information to share company strengths and weaknesses with employees. For small public companies, a common metric is the company's share price. Owners may tie bonus and compensation amounts to share price and encourage employee productivity accordingly.

Analysis and Comparison Small-business owners may use financial accounting information to analyze competitors and evaluate investment opportunities. Because financial accounting is governed by generally accepted accounting principles, the financial statements of different companies are comparable to one another.

This basis for comparability provides a standard method of analysis. Small-business owners can compute financial ratios using the company's financial statements, and compare the ratios to benchmarks or other competitors.

While financial statements are comparable, small-business owners should exercise some caution, as non-financial measures can provide insight into a company's health as well.

References Principles of Financial Accounting: About the Author John Freedman's articles specialize in management and financial responsibility.

He is a certified public accountant, graduated summa cum laude with a Bachelor of Arts in business administration and has been writing since His career includes public company auditing and work with the campus recruiting team for his alma mater.Accounting or accountancy is no doubt the universal language of business and figure.

The Importance of Capital Theory January 2, by Brittani Sponaugle Why is accounting so important?

Those that fluently speak the language are called accountants. The importance of accounting and accountancy cannot be over-emphasized. The Imporance of Accounting Theory to the Field of Accounting Essay The Importance of Accounting Theory to the Field Of Accounting The objective of theory .

Introduction to financial accounting theory. Financial accounting theory focuses on the “why” of accounting – the reasons why transactions are reported in certain ways.

The majority of introductory accounting courses cover the “what” and “how” of accounting. Jan 02,  · The accounting department typically monitors this closely by recording transactions, analyzing transaction patterns and dealing with things like payroll and taxes.

Overall, the accounting department can determine the health and efficiency of a business, and increase profitability just by studying this Brittani Sponaugle. Jun 27,  · Accounting standards keep investors, business owners and regulators on the same page.

When all businesses follow the same accounting practices, it easy to . - Purpose, Importance & Relationship to Business Just as French is considered the language of love, accounting is considered the language of business. In this lesson, you will learn exactly what.

The Imporance of Accounting - JDP Fontainebleau