Role Of Accounting

The role of accounting

Accounting is the systematic recording of financial transactions and the reporting of such transactions for decision making purposes.

As such, it can be seen that the main role of accounting is to assist in better decision making. The type of decision varies from business to business – in terms of nature, size, form and location. Below is a list of some of the role of accounting in the decision making process:

1. It allows the entrepreneur to know how much is earned. This can be compared with other alternatives to doing business. For example, an entrepreneur who is earning $1 000 a month from business but would otherwise earn $1 500 as an employee may prefer to close down business and take up a job.


2. Accounting allows the entrepreneur to have a follow up of trade payables and trade receivables and as such make better decisions about cash management.

3. Accounting makes information readily available to banks and financial institutions to allow them approve or disapprove a loan request.

4. By calculating ratios from accounting data, owners and investors may compare the results of the business with its past performances as well as with other businesses.

5. Accounting information allows the government to assess the reasonableness of the amount of tax being paid by the business.

6. Employees and trade unions may use accounting records to justify their demand for wage increase and changes in working conditions.

O Level Accounting for Beginners

Difference between book-keeping and accounting

What is accounting?  We have seen in the introduction that accounting is about 3 main things: i) Recording of financial information This part is known as book-keeping. It involves recording transactions involving money accurately and systematically. It includes recording the receipts and payments of cash, the buying and selling of goods (inventory), the buying of assets (that will be used in business) and the paying for expenses like rent and rates, electricity, salaries and wages etc.  ii) Organise information in a systematic and methodical way This involves classifying financial information so as to ease the process of preparing financial statements. Simply recording transactions does not necessarily mean such records will be useful. Records are useful only when information can be extracted rapidly and accurately. This is only possible when information is well organised. For instance, using the double entry system of recording financial transactions allows information to be extracted timely and accurately. iii) Analyse information for decision making Doing business involves a lot of decisions to be taken. Decisions are taken out of available information. However, different decision requires different types of information. For instance, deciding on a wage increase may require an analysis of profit trends as well as liquidity situation. Therefore, accounting involves the preparation of financial statements like income statement to calculate profit, the balance sheet to show financial position of the business and any such statements that would help management of a business make good decision. So what is the difference between book-keeping and accounting?  As discussed above, book-keeping is the accurate and systematic recording of business transactions. It is part of accounting. However, accounting is book-keeping plus the organising, interpreting and reporting of financial information and preparing of financial statements that enable decisions to be taken.