Why is accounting so important?
"Accounting is the fairest invention of the human mind". At first it seems like Goethe was out of his mind when he pronounced these words. Still accounting is one of the most logical (does not mean it's easy) and oldest human invention (more than 7000 years old).
But what is accounting and why is it so useful?
Accounting can be define as the recording of financial transactions related to a business. It also refers to the process of summarizing ,analyzing and reporting these transactions. A wide range of economic actors such as the management team in the firm itself, the shareholders, the banks/lenders, the competitors and the customers needs to understand the economic situation of a firm in order to make judgments and take decisions. Financial accounting not only reflects the present situation of a firm but it also provides information about the future of the firm. With that in mind, it is clear that accounting can have huge consequences and need to be regulated. Unfortunately despite these regulations many scandals have arisen and many investors have lost a lot of money on accounting frauds (see the Enron scandal).