Essay on the Role of Financial Accounting in Contemporary Business

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University of California, Santa Barbara
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Financial accounting is essential for the future and survival of the business (Weil, Schipper, & Francis, 2013). An enterprise is capable of surviving for some time in the market while having the insufficient workforce, improper human resource management, ineffective marketing plan and a blunt business strategy but cannot without a sound financial accounting management. The aim of the firm is maximizing profits, and this can only be realized through proper financial accounting.

In the contemporary business world, financial accounting is imperative as it assists in the provision of the information requirements of the external stakeholders. From the calculation of the financial statements including; Income statements, balance sheet and cash flow statements, analysis of these declarations are made hence availed to the stakeholders for the purpose of evaluating the performance of the business and to decide whether to invest in it or not (Weil, Schipper, & Francis, 2013). Also, the analyzed data can as well be utilized by the firm management in making the decision pertaining the future of the business and the activities to be undertaken by the enterprise. Notably, the level of profitability and losses incurred by the firm depends on the strategic decisions made and hence reflected in the accounting statements. In a situation where the company has ended in losses, it is the financial statements that are applied in determining the nature of judgment and decisions to be undertaken so as to improve the profitability of the business. Access to loans, the decision by external investors, taxation rate and the government policies to the company is dependent on the financial accounting hence essential for the future and survival of the business.

In support of this, in early 2016, the Board of Directors of the BG Company agreed, that it gets acquired by the Shell Oil Company as long as the agreement of paying the Shareholders of the BG assets a given amount is adhered to (Floros, & Sapp, 2011). The source of the accord was based on the financial statements indicating competence of Shell in the global market hence capability of paying the amount needed. It was an obvious boost to the future and financial stability of the company which is currently reflected well through the application of GAAP.

The Generally Accepted Accounting Principles (GAAP) are common and essential policies utilized by all the businesses and corporations since they all embrace the use of financial accountings in meeting their objectives. The purpose of the GAAP is to create uniformity in the standards applied by the institutions, especially about financial reporting (Barth, 2010). Most of the competitive multinational organizations, for example, are usually classified by revenue and losses incurred. The only way to ensure fairness in ranking and meet the required objective without biases is through the application of GAAP. Furthermore, investors may need to make the decision as per to which institution to invest in, the only way to attract investment is through the creation of a proper financial statement capable satisfying the needs of the investor hence higher chances of investment.

Furthermore, the lenders of the company may need to know the financial position of the Company so as to determine whether the business will be in a position to repay the loans owed or not. Proper assessment is best done in consideration to other institutions with a motive of determining the performance of the competitors in comparison to that of the firm in question.

In conclusion, to the non-profit making institutions, the notion of GAAP assists in creating an element of transparency especially on the part of the reporting systems hence the significance.


Barth, M. E., Landsman, W. R., Lang, M., & Williams, C. (2010). Are International Accounting Standards-based and US GAAP-based accounting amounts comparable. Available at SSRN 1585404.

Floros, I. V., & Sapp, T. R. (2011). Shell games: On the value of shell companies. Journal of Corporate Finance, 17(4), 850-867.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

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