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INTRODUCTION: Why does accounting matter?E-LEARNING COURSE: ACCOUNTING & FINANCES

Why does accounting matter?

• Accounting is the language companies speak.

DepreciationDebt

AssetsYear-end results

EBITDA

Cash - flow

In the business world everyone in almost every department and at every level uses certain specific concepts. We know broadly what they mean, but there is often much more to them. Most importantly, we must remember that such indicators, concepts, figures... and ultimately, the very progress of a company, are affected by our business decisions.

• Investors attach great importance to accounting information

Profit for the financial year and from previous financial years, financial ratios, debt level, investment financing, profitability of business lines... These are all accounting aspects that existing and potential investors care about.

Profit

Loss

Debt/ Savings

Financial forecast

Why does accounting matter?

• Accounting is a reflection of the company’s situation

Accounts help us gain information about a business. They can show a company’s situation in different ways. It all depends on how information is presented, what is emphasized, how the information is summarized, etc. As partners, managers, or members of an organization it is important to know how our company is presented to external actors and how external actors perceive it, and whether or not a true and fair view of our company’s situation is given.

True and fair view?

Why does accounting matter?

• Accounting helps take management and business decisions

Many factors, other than economic aspects, are considered when making a decision. However, economic criteria rank high…

Decision-making

Criteria:- Economic- Strategic- Commercial

Why does accounting matter?

Why is accounting useful?

Accounting provides information about a business.

Accounting is a tool that RECORDS, CLASSIFIES and SUMMARIZES company events measured as monetary units.

• However:

ONLY company EVENTS can be recorded. These events must be solidly and clearly supported. Otherwise, it will not be possible to explain, record, classify, or summarize them.

ONLY events that can be measured as monetary units can be recorded.

The “language” of accounting

• Accounting PrinciplesA special “language” is used in order to measure business events as economic units: ACCOUNTING. This language follows rules or grammar principles known as Accounting Principles.

• Drawback: There are just a few principles and these are not fixed rules. That is why they are commonly referred to as “generally accepted” principles. This might lead to misunderstandings if some details are not known.

Click HERE to learn more about accounting regulations.

Business events that can be measured as

$

RECORDED (Log book)CLASSIFIED (Ledger)SUMMARIZED (Financial Statements)

ACCOUNTINGPrinciples

Assumptions

Users

“OBJECTIVE”reliable - unbiased

“USEFUL”relevant - timely

UsersInformationTime Dimension

External actors

Internal actors

External users: Suppliers, clients, banks, tax authorities…they all use a company’s accounting information to make their decisions: selling or buying goods, granting loans, assessing taxes. These users look for factual information, normally from past years, because they need to rely on objective data.Internal users: Shareholders, managers, employees, unions…they all look for guidance and/or reassurance in a company’s accounting information in order to determine the future outcome of the decisions they make today. To do that, they rely on information about the company’s future, even if such information is less precise and more open to debate.

© In

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to In

tern

acio

nal S

an T

elm

o, 2

012