The Accounting Framework and Financial Statements
- [Amsterdam Centraal, Amsterdam, Netherlands - Tim Trad]
- The Accounting Process
Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. The financial statements used in accounting are a concise summary of financial transactions over an accounting period, summarizing a company's operations, financial position, and cash flows.
A bookkeeper can handle basic accounting needs, but a Certified Public Accountant (CPA) should be utilized for larger or more advanced accounting tasks. Professional accountants follow a set of standards known as the Generally Accepted Accounting Principles (GAAP) when preparing financial statements.
Except in small businesses, much routine accounting work has become highly mechanized andaspects of the automatic. The emergence of electronic data processing has freed accountants from the routine aspects of recording and classifying data, enabling them to concentrate more on the analytical and interpretive aspects of the accounting function. These are the areas most affected by the new demands for accounting information. Regardless of methods used, the underlying accounting concepts are essentially the same.
- Financial Accounting
One of the most important functions of the accounting process is to accumulate and report accounting information that shows an organization's financial position and the results of its operation. Many businesses publish such financial statements at least annually. The subdivision of the accounting process that produces these general-purpose reports id referred to as financial accounting.
Financial accounting refers to the processes used to generate interim and annual financial statements. The results of all financial transactions that occur during an accounting period are summarized into the balance sheet, income statement, and cash flow statement. The financial statements of most companies are audited annually by an external CPA firm. For some, such as publicly traded companies, audits are a legal requirement.
However, lenders also typically require the results of an external audit annually as part of their debt covenants. Therefore, most companies will have annual audits for one reason or another.
Financial accounting statements are the main source of information for parties - other than governmental agencies - outside the business firm. Because these reports will often be used to evalute management, their objectivity could be subject to question.
- Managerial Accounting
A major function of accounting is to provide management with the data needed for decision making and for efficient operation of the firm. Although management people routinely receive the financial reports, tax returns, and special reports prepared for outsiders, they also require various other information, such as the unit cost of a product, estimation of the profit earned from a specific sales campaign, cost comparisons of alternative courses of action, and long-range budget. The process of generating and analyzing such data is often referred to as managerial accounting.
Managerial accounting uses much of the same data as financial accounting, but it organizes and utilizes information in different ways. Namely, in managerial accounting, an accountant generates monthly or quarterly reports that a business's management team can use to make decisions about how the business operates. Managerial accounting also encompasses many other facets of accounting, including budgeting, forecasting, and various financial analysis tools. Essentially, any information that may be useful to management falls underneath this umbrella.
- Cost Accounting
Just as managerial accounting helps businesses make decisions about management, cost accounting helps businesses make decisions about costing. Essentially, cost accounting considers all of the costs related to producing a product. Analysts, managers, business owners, and accountants use this information to determine what their products should cost. In cost accounting, money is cast as an economic factor in production, whereas in financial accounting, money is considered to be a measure of a company's economic performance.
[More to come ...]
