Accounting information can be classified into two categories: financial accounting or public information and managerial accounting or private information. Financial accounting generates reports and communicates them to external decision makers (stockholders, creditors, customers, suppliers, regulatory commission, and financial analysts) so that they can evaluate how well the business has achieved its goals. These reports are called financial statements, they relate to the financial position, liquidity (that is, ability to convert to cash), and profitability of an enterprise.
Managerial accounting provides internal decision makers who are charged with achieving the goals of profitability and liquidity with information about financing, investing, and operating activities. Managers and employees who conduct the activities of the business need information that tells them how they have done in the past and what they can expect in the future.
Of the various specialized areas of accounting that exist, the three most important are auditing, income taxation, and nonbusiness organizations. Auditing is the examination, by an independent accountant, of the financial data, accounting records, business documents and other pertinent documents of an organization in order to attest to the accuracy of its financial statements. Large private and public enterprises sometimes also maintain an internal audit staff to conduct audit like examinations.
The second specialized area of accounting is income taxation which deals with preparing an income-tax form. It is connected with collecting information and presenting data in a coherent manner. Therefore, both individuals and businesses frequently hire accountants to determine their taxes: although tax rules are not identical with accounting theory and practices, but many techniques of computing are common to both areas.
A third area of specialization in accounting is for nonbusiness organizations, such as universities, hospitals, government agencies. These organizations differ from business enterprises in that they receive resources on some nonreciprocating basis (that is, without paying for such resources), they do not have a profit orientation, and they have no defined ownership interests as such. As a result, these organizations call for differences in record keeping, in accounting measurements, and in the format of their financial statements.
In the measurement of business transactions, large amounts of data are gathered. These data require a method of storage. This filing system consists of accounts. Accounting system has a separate account for each asset, each liability, and each component of owner's equity, including revenues and expenses. Whether a company keeps records by hand or by computer, management must be able to refer to accounts so that it can study the company's financial history and plan for the future. A very small company may need only a few dozen accounts, a multinational or a big one may need thousands.
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In a manual accounting system, each account is kept on a separate page or card. These pages or cards are placed together in a book or file called the general ledger. In the computerized system that most companies have today, accounts are maintained on magnetic tapes or disks, but accountants still refer to the all-inclusive group of company accounts as the general ledger, or simply the ledger. A list of the numbers with corresponding account names is called a chart of accounts.
The people who use accounting information to make decisions fall into three categories:
1) Those who manage a business (management);
2) Those outside a business enterprise who have a direct financial interest in the business (investors, creditors);
3) Those people, organizations, and agencies that have an indirect financial interest in the business (tax authorities, regulatory agencies, and other groups: financial analysts and advisers, brokers, lawyers, economists, customers).
Vocabulary:
nonbusiness organization
pertinent ,
to attest to the accuracy ,
coherent manner , ()
nonreciprocating basis
filing system ()
revenue (),
expenses ,
ledger ,
all-inclusive group of accounts ,
chart of accounts . ,
to fall into
Questions:
1. What are the two categories of accounting?
2. What does financial accounting generate?
3. Give the definition of managerial accounting.
4. What are the most important specialized areas of accounting? Enumerate them.
5. How are the accounting data organized and kept?
6. Who uses accounting information?
