What Is Accounting and Who Uses It?

What is accounting exactly? Accounting is an information system that measures business activity, processes that data into various reports, and communicates with decision makers of the results. Some would say that accounting is the language of business. It’s important for business owners to understand this language to they can better manage their business. Understanding what income is and how it is calculated is the basic concept of accounting.

People Who Use Accounting Information

An individual can use accounting for personal use to see how much cash they have, to find out how much they need to save each month to retire, or how much money they will need for college. An individual also uses accounting information to manage their cash flow to understand their expenses and how much money is used every time they receive a paycheck (for bills and other necessities).

Business owners use accounting to set goals for their business, to measure the progress of these goals and to make financial adjustments when they are needed. Financial statements give business owners information they need to help them make decisions. For example, a financial report could help a business owner make a decision about buying new equipment or not for the business. This is to help prevent unnecessary loss to the company.

Investors need to use accounting information to make informed decisions about whether or not to invest in a particular company or start up. After an investor places his or her money into a company, they use that company’s financial statements to analyze how their investment is performing. Besides investing into a company, a person can invest in their retirement through a company retirement plan or IRA contributions. Understanding a company’s financial statements will help you decide which investments to pick.

A person or business lending money, or a creditor, uses accounting to evaluate a company’s ability to make loan payments by reviewing financial statements. This process is also applied to individuals who are looking to borrow money for a new car or house. A bank will review accounting data to determine your ability to make the loan payments.

Federal, state and local governments levy taxes. Income tax is figured using accounting data. By keeping good accounting records, individuals and businesses can take advantage of lawful deductions. Without good records, the IRS can disallow these tax deductions resulting in a higher tax bill and possibly a penalty added on.

The Accounting Profession

One thing all businesses have in common is that they all need accountants. They hire a CPA or a CMA, certified public accountant or certified management accountant. A CPA is a licensed professional accountant who serves the general public. A CMA is a certified management accountant who works for a single company. An individual who wants to become a CPA or CMA must meet educational and/or experience requirements and pass a qualifying exam.

The average salary for a college graduate with a bachelor’s degree in accounting is around $48,000 per year. A graduate with a master’s degree can earn about 10% more to start, and a CPA can earn another 10%.

Accountants deal with every aspect of a company’s business in order to record all of its activities. Because of this, accountants can get to the top of an organization as often as anyone else. Accountants often have a large view of what is going on in a company.