Accounting: The Language of Business (Part 4)

“Life is like accounting; everything must be balanced.” —Unknown

Introduction to Accounting and Business (Part C)

by

Charles Lamson

The Role of Accounting in Business

What is the role of accounting in business? The simplest answer to answer this question is that accounting provides information for managers to use in operating the business. In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business.

In a general sense, accounting can be defined as an information system that provides reports to stakeholders about the economic activities and condition of a business. We will focus our discussions on accounting and its role in business. However, many of the concepts in this analysis will apply also to individuals, government, and other types of organizations. For example, individuals must account for activities such as hours worked, checks written, and bills due. Stakeholders for individuals include creditors, dependents, and the government. A main interest of the government is making sure that individuals pay the proper taxes. 

You may think of accounting as the "language of business." This is because accounting is the means by which business information is communicated to the stakeholders. For example, accounting reports summarizing the profitability of a new product help Coca-Cola's management decide whether to continue selling the product. Likewise, financial analysts use accounting reports in deciding whether to recommend the purchase of Coca-Cola stock. Banks use accounting reports in determining the amount of credit to extend to Coca-Cola. Suppliers use accounting reports in deciding whether to offer credit for Coca-Cola's purchases of supplies and raw materials. State and federal governments use the accounting reports as a basis for assessing taxes on Coca-Cola.

The process by which accounting provides information to business stakeholders is illustrated in Exhibit 3. A business must first identify its stakeholders. It must then assess the various informational needs of the stakeholders and design its accounting system to meet those needs. Finally, the accounting system records the economic data about business activities and events, which the business reports to the stakeholders according to their informational needs. 

Stakeholders use accounting reports as the primary source of information on which they base their decisions. They use other information as well. For example, in deciding whether to extend credit to an appliance store, a banker might use economic forecasts to assess the future demand for the store's products. During periods of economic downturn, the demand for consumer appliances normally declines. The banker might inquire about the ability and reputation of the managers of the business. For small corporations, bankers may require major stockholders to personally guarantee the loans of the business. Finally, bankers might consult industry publications that rank similar businesses as to their quality of products, customer satisfaction, and future prospects for growth.

Business Ethics

Individuals may have different views about what is "right" and "wrong" in a given situation. Unfortunately, business managers sometimes find themselves in situations where they feel pressure to violate personal ethics.

The moral principles that guide the conduct of individuals are called ethics. Regardless of differences among individuals proper ethical conduct implies a behavior that considers the impact of one's actions on society and others. In other words, proper ethical conduct implies that you not only consider what's in your best interest, but also what's in the best interest of others.

Ethical conduct is good business. For example, an automobile manufacturer that fails to correct a safety defect to save costs may later lose sales due to lack of consumer confidence. Likewise, a business that pollutes the environment may find itself the target of lawsuits and customer boycotts.

Business people should work within an ethical framework. Although an ethical framework is based on individual experiences and training, there are a number of sound principles that form the foundation for ethical behavior:

1. Avoid small ethical lapses. Small ethical lapses may appear harmless in and of themselves. Unfortunately such lapses can compromise your work. Small ethical lapses can build up and lead to larger consequences later.

2.  Focus on your long-term reputation. One characteristic of an ethical dilemma is that it places you under severe short-term pressure. The ethical dilemma is created by the stated or unstated threat that failure to "go along" may result in undesirable consequences. You should respond to ethical dilemmas by minimizing the short-term pressures and focusing on long-term reputation instead. Your reputation is very valuable. You will lose your effectiveness if your reputation becomes tarnished.

3.  You may suffer adverse personal consequences for holding to an ethical position. In some unethical organizations, managers have endured career setbacks for not budging from their ethical positions. Some managers have resigned because they were unable to support management in what they perceived as unethical behavior. Plus, in the short-term, ethical behavior can sometimes adversely affect your career. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 8-9*

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