The Role of Financial Accounting in Business


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This paper is meant to give an informative view on how financial accounting is used to help small and large businesses make positive and safe financial decisions. It is designed to help small business owners without a vast knowledge or understanding of accounting or of financial reports achieves maximum growth. We will examine the importance of financial reports as well as being able to account for a company’s assets and spending. Through proper accounting and reporting companies have a better way of assimilating what areas can be improved by comparing the reports of prior years and evaluating the differences in what was done then and now. It helps to provide a guide as to what actions the company may want to take to in order to improve or hold its place in its industry.

Financial reports are a necessary tool used by investors and potential investors to see how a company functions and stands financially. It is a deciding factor in what and how much will an investor invest in a company. It is also used to analyze and assess a companies potential areas of growth as well as its areas of loss. It is also a way for a company to track its earnings and losses of past years. It can be used to asses the effect of company trends and see how they may have affected the company whether positive or negatively. Looking at the managers annual report helps to determine some of the reoccurring factors that have affected the financial statements and give clues on what can be done to avoid potentially dangerous financial events in the future. The reports also come in handy when having to refer back to companies financial statements when being audited. Financial reports can be also is used to determine what the company’s expected future shares will be sold at.
When putting together a financial report there are four parts that are needed. These four parts are the key elements that are needed in order to accurately show the companies financial standings in the report. The parts are: balance sheets, income statements, cash flow statements, and the statements of shareholders’ equity. Each statement shows the companies financial flow, where, and how the money is being spent. The financial statements work as follows:

The balance sheet:

The balance sheet shows what the company’s assets are and what it owes for its assets also known as liabilities.

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It also gives you an idea of the company’s assets that are of a proprietary nature. These are also known as the companies "intangibles". The intangible assets can include anything from name branding, logos, and licenses. This information is very valuable and if properly maintained can show what is owed at any given time.

The cash flow statement:

The cash flow statement shows what, where, how the company spends its money. It also shows the money that the company is owed but has not yet received.

The income statements:

The income statement shows what money in received by the company for product sales and the different services offered by a company. The income statement is also known as the profit and loss statement. It is used to show the company’s investors and its managers how the company made and lost money.

The statement of shareholders’ equity:

The statement of shareholders’ equity shows the changes in the shareholders equity. It shows the remaining assets that are spread amongst the shareholders as individuals.

As mentioned earlier a companies financial statements stand as a valuable resource for businesses to relay their financial standings to potential investors as well as account for their assets and expenditures in case they are ever required to show appropriate records for auditing purposes. Businesses truly benefit when they have good financial reports. Many companies outsource their accounting departments to companies that specialize in keeping the records of small businesses. These companies represent the small business in times of auditing and are bonded to take the responsibility of accounting errors, thus taking the stress off the mall business owner; however it is still the small business that is responsible for its growth. It is in the hopes that this presentation has been informative and has stressed the importance of good accounting and the advantages of having updated financial reports.


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