THE ROLES OF ACCOUNTING AND BUSINESS

Advent of the Corporation

Now we travel to the end of the 18th century when important economic and institutional changes have taken place. The Industrial Revolution which started during the latter part of the 18th century in England has been responsible for technological developments that eventually lead to changes in the systems of production, marketing, and financing.

Manufacturing firms that produce products from raw materials for sale to consumers are commonplace and distribution systems for these products are increasingly sophisticated. The development and use of machinery allow for mass production of inexpensive goods. Revolutions in transportation, such as railroads, create access to new markets for the goods. These changes precipitate the need for additional sources of funds, and financial institutions grow to meet this need. More elaborate accounting systems evolve in order to respond to the requirements of management and owners as well as those of the financial institutions that provide funds to the business.

As business increases, it is possible to accumulate wealth and have funds available for investment purposes. Corporations emerge to provide opportunities for investing in businesses without the obligation to oversee the day-to-day business operations. A corporation is a business entity that is legally separate and distinct from its owners. Corporations are attractive business ventures because they provide investors with limited liability, that is, the investors are not personally liable for the debts of the business. If the business fails, the most an investor can lose is the amount of his or her investment because the corporation's creditors cannot demand any additional monies from investors.

The advent of the corporation places additional requirements on the accounting system because investors, called shareholders or stockholders, have invested primarily for the return (profit) that the business operations generate. Thus, there is a need for frequent, periodic reporting on the status of the business and its operations since it is not feasible for investors to personally oversee operations. Therefore, investors must rely on the information generated by the accounting system to hold the managers accountable.

Date: 2015-01-02; view: 1030