The Nature of Accounting

Accounting is the system a business uses to measure its financial

performance by recording and classifying sales, purchases, and other

transactions. Accounting also provides ways to present this information

that make it possible to evaluate a company’s past performance, present

condition, and future prospects.

Accounting is important to business for two reasons: it helps man-

agers plan and control a company’s operations, and it helps outsiders

evaluate the business. Because these two audiences use accounting in-

formation in different ways, accounting has two distinct facets.Finan-

cial accounting is concerned with preparing information for the outside

world;management accounting is concerned with preparing information

for internal use.

Financial accounting. The outsiders who use accounting information

have a variety of interests. Suppliers, banks, and other lenders want to

know whether the business is creditworthy; investors and shareholders

are concerned with the company’s profit potential; government agen-

cies are mainly interested in regulating the business and collecting taxes.

These users need information that is objective, consistent over time, and

comparable to information supplied by other companies. Thus financial

accounting statements adhere to certain standard formats and are pre-

pared according to Generally Accepted Accounting Principles (GAAP)

that have been established and agreed on by the accounting profession

over many years.

Management accounting. Management accounting, in contrast, is

tailored to the needs of managers in a particular company. Its overall

purpose is to help the managers evaluate results and make informed de-

cisions. In a typical company, the management accounting system cov-

ers a wide range of financial activities, from recording sales and sending

out invoices to helping top management evaluate expenditures on build-

ings, equipment, and labor.

Thus, of the several available definitions of accounting, the one de-

veloped by an American Accounting Association committee is perhaps

the best because of its focus on accounting as an aid to decision making.


This committee defined accounting as “the process of identifying, mea-

suring, and communicating economic information to permit informed

judgments and decisions by users of the information.”

2. Read the text again and say if the following statements are true or false

according to the information in the text; correct the wrong ones.

1. Accounting information can help managers evaluate a company’s

prospects. 2. It is management accounting that is concerned with pre-

paring information for the outside world. 3. Financial accounting pre-

pares information for internal use. 4. The outsiders that need a compa-

ny’s accounting information are banks, suppliers, investors, government

agencies. 5. Financial accounting statements are prepared in accordance

with Generally Accepted Accounting Principles. 6. Management ac-

counting helps the managers to evaluate a company’s performance and

make informed decisions. 7. Accounting is the process of identifying,

measuring, and communicating economic information.

3. Complete the following sentences on the basis of the information in

the text.

1. Accounting is the system of measuring … . 2. Accounting helps

managers plan … . 3. Accounting helps outsiders … . 4. Lenders want

to know if the business … . 5. Government agencies are interested in

… . 6. Financial accounting statements are prepared according to … .

7. Management accounting is tailored to …. . 8. Management account-

ing activities include… .

4. Summarize the contents of the text in 5–7 sentences.

Text 2

1. Scan the text below and pick out the terms that are used to name ac-

counting titles and jobs in the USA.