The Effect Of Financial Accounting Reporting On The Management Of A Business



          Language is a means of communication. Not everyone understands it and anyone who wants to understand it must learn it or have it interpreted. The learners of accounting as a language of business get those who know accounting to teach them. Owners of business enjoy accountants as the “interpreters” of accounting language and this is often so when management is separated from ownership.

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Like all language, “the language of accounting involves all languages and  grammars. Learning the vocabulary involves becoming familiar with both the exact definitions of accounting words and how they are used. For example, if Mr X is buying Mr Y’s business an electronics stores and studio (involving records and tapes) one of the major items Mr X would buy is Mr Y’s inventory on hand and this inventory would be made of records and tapes. An accountant reports may show the following items.

Cash                     =                 #5,000

Merchandise         =                 #80,000

Supplies               =                 #3,000

Total                    =                 #88,000

From the above items, the accountants definition of “Merchandise inventory” is stock of goods on hands for sale to customers. The accounting meaning of “Supplies”  is materials for use in the business and not for sale.

With the definitions Mr X is getting to understand what he would be buying. But it is to be known that the #88,000 does not represent the accountants value of inventory at the “Business firms cost rather than the selling price. The “Grammatical “ part of accounting as a language of business involves a generally acceptable ordering of information in connection with a particular business organization. The ordering of this information aids the uses of such information in its location. An analogy can be discuss from looking up. For a word is a dictionary assuming a person wants to look for the words from the word “ Humble” through “Hunting iron” if the word “Hunt” is not found between those words, then it is assumed that there is no such word as “Hunt” in the dictionary.

Similarly, the financial statement have a conventional ordering. When a person looks for a particular item, he goes straight to a specific accounting reports where he knows that the item is spouse to be. The absence of the item there indicates that firm has no such item or it is too insignificant to be given a separate place in the report.

However, accounting as a language of business is slightly different from most other language in that it uses mainly figures and its always in a concise reports firm. This, in effect shows that accountant reduces to small readable pages in the form of number what if written in a narrative English language, should run for a great number of page.

As language is used in expressing view, giving orders and judgment  taking decision. In the same way, accounting as a business language is used in expressing opinion decision making, giving orders and passing judgment on the affairs of a particular business for a specific period.



Financial Accounting Information is directed towards the common needs of wide variety of users. There are two broad categories of users. These include management, owner/shareholders, Employees and union, potential owners existing and potential creditors and others which will be treated individually.

  1. MANAGEMENT: Management is one of the major users of accounting information (Internal). Ronald Thackers made this known when he wrote”… Management uses this information to formulate broad policies for the firm and to make special decision having a lasting impact on the firm”

It is from financial  statement that are prepared that acconuntants the management derives most of the financial accounting information which helps them to take decision on the organization.

Different users of accounting information have different decision to take.

The decision taken by management are to enhance profitability of the business and these decisions affect the business  more than any other users decision.

“Accounting provide a means of evaluating management performance in carrying out individual activities as in operating the business as a whole”

establishment of standard as well as guide post are done by the accountants and these standards are of performance. Moreso, to know which alternative to choose management must depend on accountants to provide them with alternatives.

  1. OWNERSHIP/SHAREHOLDERS: Owners interest in a business cannot be over emphasized. There are majr users of information and they are external. Raynold, slavin and sanders put it this way “all investors depend upon accounting information included in the accounting report” they rely on financial accounting information in making the decision on whether to invest on a particular business or not. They judge the organization from its report and determine whether to start or continue their support for the organization.

Historical as well as current reports of business are taken into consideration by the owners or shareholders are often made between the organization and any other organization.

  1. EMPLOYEE (AND UNION): Employee of a business are also users of accounting information (Internal Users) in the sense that no employee would like to be tried at an unexpected time because of the financial position of the business. So employee need job security. They also have interest in things such as business and pension plans as well as profit sharing of the business. The better a business is placed along these times, the more secure the employee will feel. Labor and trade Union are also interested when negotiating for increased compensation and often use the information from financial statement to back their argument.
  2. POTENTIAL OWNERS: Potential owners need accounting information. These really dig deep into accounting reports to find the possibility of the business continuing and also future profit making trend. They are more careful because they want to commit their resources to a particular business for the first time. If it fails, then reap the fruit of their investment. A.T Montgomery \puts it like this “ potential new owners of the firm need information to evaluate the desirability of making an ownership investment is becoming owners of the firm .

The differences between existing owners and potential owners is that the existing owners has already invested in the firm and may not easily withdraw his investment but potential owners are those yet to invest, who have interest in investing.

  1. Existing and potential creditors and customers. About this group of users, Black Befitting expression runs thus…They investigate it financial standing whether to extend credit to it all at all. What amount to extend and under what term”

Most of the creditors are those who are interested in financial accounting information because they have to judge the business ability to pay for the goods bought on account and whether the business is in a portion to supply its customers the needed goods regularly. Assuming a business falls in the duty to pay its suppliers or give regular supply to its customers, potential customers and suppliers will not be interested in the business any longer.

  1. GOVERNMENT AGENCIES: Both state and federal government are interested in financial accounting reports for tax assessment purposes. They may also need these reports for publications and ranking of firms.

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