Question

• How does the description of accounting as the “language of business” relate to accounting as being useful for investors and creditors?
• Explain how the decisions you would make might differ if you were an external investor or a member of an enterprise’s management team.

Answer 1

Accounting is a systematic process of identifying, measuring, recording, classifying, summarising, interpreting and communicating financial information. It shows profit earned or loss incurred during the accounting period. Since accounting is a medium of communication, thus it is called Language of Business.

As per American Institute of Certified Public Accountants, accounting is a art of recording, classifying and summarising in a significant manner and it terms of money; transactions and events which are, in part at least,of a financial charterer, and interpreting the results thereof.

Users of Accounting Information

Investors: Investors are ones who money are at a stack in the business. Anything mis-happening will flew their money away. Investors having risk but do not have a direct control over the business. Therefore accounting information is very much useful for them to analyze whether it is feasible to invest in a particular business or after investment how business is performing.

Creditors: Creditors are ones who supply goods and services on credit. It is common practice to supply goods and services on credit in industry. Before granting credit, creditors satisfy themselves about the credibility and credit worthiness of the business. Accounting information helps then in making such decision.

Investors does not have direct control over the business and further their responsibility is secondary towards the business they invested. Their main focus is that the money they invested should be safe and must give expected rate of return. On the other hand, Management who have direct control over the business knows every in and out of the business. They are responsible for every business activity. They are accountable to investors about business performance. Management is taking care of all operational decisions as well as strategic decisions while investors are only interested in strategic decisions.