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Chapter 1: Accounting Information: Users and Uses The Relationship of Accounting to Business
Book Title: Financial Accounting: IFRS Edition
Printed By: Maurren Salido (2019081451@feu.edu.ph)
© 2018 Cengage Learning Asia, Cengage Learning Asia

The Relationship of Accounting to Business

Business is the general term applied to the activities involved in the production and
distribution of goods and services. Accounting is used to record and report the financial
effects of business activities and, as mentioned earlier, is called the “language of business.”
Without accounting information, many important financial decisions would be made blindly.
Investors, for example, would have no way to distinguish between a profitable company and
one that is on the verge of failure; bankers could not evaluate the riskiness of potential
loans; corporate managers would have no basis for controlling costs, setting prices, or
investing the company’s resources; and governments would have no basis for taxing
income.

All business enterprises have some activities in common. As shown in Exhibit 1.3, one
common activity is the acquisition of monetary resources. These resources, often referred to
as “capital,” come from three sources:

1. investors (owners)

2. creditors (lenders)

3. the business itself in the form of earnings that have been retained

Exhibit 1.3
Activities Common to Business Organizations

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Once resources are obtained, they are used to buy land, buildings, and equipment;
purchase materials and supplies; pay employees; and meet any other operating expenses
involved in the production and marketing of goods or services. When the product or service
is sold, additional monetary resources (revenues) are generated. These resources can be
used to pay loans or taxes, and buy new materials, equipment, and other items needed to
continue business operations. In addition, some of the resources may be distributed to
owners as a return on their investment. The company that owns the 7-Eleven Chain,
President Chain Store Corporation (PCSC), for example, uses the earnings from its
operations to open new stores and purchase inventory for those new stores. Once the new
stores are opened, they produce more funds that can then be used to open more stores.
PCSC also distributes many of its resources back to its owners. Owners also receive a
return on their investment through increases in the value of the stock.

In the manufacturing sector, TSMC manufactures wafers for its customers. The cash earned
from operations is used to support the investment in new fabs and facilities that suit the new
technology. These earnings can also be used to distribute cash back to its shareholders.
The cash amount that TSMC paid in 2015 to its shareholders as dividends was as high as
NT$117 billion.

Accountants play two roles with regard to these activities.

Measuring and reporting. Accountants measure and communicate (report) the

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results of business activities—in other words, accountants keep score. To measure

these results accurately, accountants follow a standard set of procedures referred to
as the accounting cycle (The procedure for analyzing, recording, classifying,
summarizing, and reporting the transactions of a business.) . The cycle includes
several steps, which involve analyzing, recording, classifying, summarizing, and
reporting the transactions of a business.

Advising. Accountants advise managers on how to structure these activities so as to

achieve the goals of the business, such as generating a profit, minimizing costs,
providing efficient services, etc.

Remember This

Accounting is designed to accumulate, measure, and communicate financial

information about businesses and other organizations.

Accounting provides information for making informed decisions about how to

best use available resources.

Accounting is often called the “language of business.”

Chapter 1: Accounting Information: Users and Uses The Relationship of Accounting to Business
Book Title: Financial Accounting: IFRS Edition
Printed By: Maurren Salido (2019081451@feu.edu.ph)
© 2018 Cengage Learning Asia, Cengage Learning Asia

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means -
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