ACCOUNTING
INTRODUCTION
Operating Information
This is the information that is
needed on a day-to-day basis in
order for the organization to
conduct its business. Employees
need to get paid, sales need to
be tracked, the amounts owed to
other organizations or
individuals need to be tracked,
the amount of money the
organization has needs to be
monitored, the amounts that
customers owe the organization
need to be checked, any
inventory needs to be accounted
for: the list goes on and on.
Operating information is what
constitutes the greatest amount
of accounting information and it
provides the basis for the other
two types of accounting
information.
Financial Accounting Information
This is the information that is
used by managers, shareholders,
banks, creditors, the
government, the public, etc… to
make decisions involving the
organization and its operations.
Shareholders want information
about what their investment is
worth and whether they should
buy or sell shares, bankers and
other creditors want to know
whether the organization has an
ability to pay back money lent,
managers want to know how the
company is doing compared to
other companies. This type of
information would be very
difficult to extract if every
company used a different system
for recording their financial
position. Financial accounting
information is subject to a set
of ground rules that dictate how
the information is reported and
this ensures uniformity.
Managerial Accounting
Information
In order for the
managers of a company to make
the best decisions for a company
they need to have specific
information prepared. They use
this information for three main
management functions: planning,
implementation and control.
Financial information is used to
set budgets, analyze different
options on a cost basis, modify
plans as the need arises, and
control and monitor the work
that is being done.
As you can see, accounting is a
multifaceted system involving
different people with different
needs and after analyzing the
various uses and applications of
accounting information the
American Accounting Association
has come up with this
definition: “the process of
identifying, measuring, and
communicating economic
information to permit informed
judgments and decisions by users
of the information.”
In order to facilitate the
informed use of this financial
information, accounting has come
to be based on specified rules
or conventions called
“principles.” These principles
provide general laws or rules
that are used to guide
accounting activity and are
called Generally Accepted
Accounting Principles, or GAAP
for short. These principles are
established by the Financial
Accounting Standards Board (FASB)
which is a nongovernmental
agency funded by the accounting
profession and contributions
from business organizations.
While there is no legal
obligation for companies to
adhere to GAAP, there are strong
practical reasons to do so. From
auditing to reporting earning to
the US Securities Exchange
Commission to applying for a
loan, there are very compelling
reasons for organizations to
conform to the generally
accepted standard.
What Is The End Result Of All
This Accounting Information?
We’ve talked about the reason
for maintaining accounting
information and the end result
of all of this recording is the
preparation of financial
statements. These statements let
people see, at a glance, the
financial position of an
organization. These statements
provide summaries of the
operating information and are
used extensively by people
within and external to the
company. The statements fall
into one of two categories:
-
Status/Stock – these statements
show the financial status of an
organization at one specified
instant in time. Stock reports =
a snapshot.
-
Flow Report – these statements
show the flow of financial
information over a period of
time. Flow reports = motion
picture
GAAP requires the preparation of
three different statements:
Balance Sheet
A Balance Sheet is
a status report that shows
information about the
organization’s resources at one
given time. Examples of
information found on a balance
sheet are how much cash is in
the bank, what is owed to
creditors, and the value of the
company’s assets.
Income Statement
An Income
Statement (also called a
Statement of Earnings, Statement
of Operations, or a Profit and
Loss Statement) is a report that
shows the flow of revenues
(amounts earned from business
activity) and expenses (amounts
paid in the course of
operations) over a given period
of time, typically a month,
quarter, or year.
Statement of Cash Flow
As the
name suggests, this is also a
flow statement that details the
movement of cash through the
organization over a specified
period.
The whole purpose of accounting
is to provide information that
is useful and relevant for
interested parities when making
decisions regarding the company
and its operations. In order to
do that effectively, a specific
language and subsequent rules
have been developed for users of
the information. By learning
accounting you learn these rules
and can then communicate
financial information with
others in a comprehensible and
comparable manner.
Learn
basic accounting.