1. Accounting Basics: Introduction
  2. Accounting Basics: History Of Accounting
  3. Accounting Basics: Branches Of Accounting
  4. Accounting Basics: The Basics
  5. Accounting Basics: The Accounting Process
  6. Accounting Basics: Financial Statements
  7. Accounting Basics: Financial Reporting

Accounting can be divided into several areas of activity. These often overlap and they are often closely intertwined. But it's still useful to distinguish them, not least because accounting professionals tend to organize themselves around these various specialties.

Financial Accounting

Financial accounting involves supplying information internally within the organization and to external stakeholders including shareholders, creditors and government/regulatory agencies as required.

Periodic reporting of a company's financial position and the results of operations to external parties through financial statements ordinarily includes the balance sheet (statement of financial condition), income statement (the profit and loss statement, or P&L), and the statement of cash flows. A statement of changes in owners' equity is also often prepared.

Financial statements are relied upon by suppliers of capital such as shareholders, bondholders and banks. Customers, suppliers, government agencies and policymakers also use this information. (To learn more on this read, What You Need To Know About Financial Statements.)

Wall Street uses the information from financial statements as the basis of much of their analysis of publicly-traded companies to determine if their stock is a good investment. Private companies, including start-ups, also need accurate and compliant financial statements so potential investors can assess whether they want to invest capital.

When preparing financial statements, American companies use Generally Accepted Accounting Principles or GAAP. The primary source of GAAP is the rules published by the FASB and its predecessors; but GAAP also derives from the work done by the SEC and the AICPA, as well standard industry practices. (For more on this see, What is the difference between the IAS and GAAP?)

Management Accounting

Where financial accounting focuses on external users, management accounting emphasizes the preparation and analysis of accounting information within the organization. According to the Institute of Management Accountants, it includes "…designing and evaluating business processes, budgeting and forecasting, implementing and monitoring internal controls, and analyzing, synthesizing and aggregating information…to help drive economic value."

Reports are tailored to the needs of individual managers or functional areas of the organization such as manufacturing, distribution, sales, marketing or others. The information should be presented in a fashion that highlights relevant information that aids operational managers in managing their operation.

The discipline of management accounting arose out of what was originally cost accounting, the allocation of costs to the proper area of the manufacturing and distribution process at an industrial company. In recent years, management accountants have developed new approaches like activity-based costing (ABC) and target costing, but they continue to debate how best to provide and use cost information for management decision-making.

Auditing

Auditing is the examination and verification of company accounts and the firm's system of internal control. There are both external and internal auditors.

External auditors are independent firms that inspect the accounts of an entity and render an opinion on whether its statements conform to GAAP and present fairly the financial position of the company and the results of operations. In the U.S., four huge firms known as the Big Four — PricewaterhouseCoopers, Deloitte Touche Tomatsu, Ernst & Young, and KPMG — dominate the auditing of large corporations and institutions.

The external auditor's primary obligation is to users of financial statements outside the organization. The internal auditor's primary responsibility is to company management. According to the Institute of Internal Auditors (IIA), the internal auditor evaluates the risks the organization faces with respect to governance, operations and information systems. Its mandate is to ensure (a) effective and efficient operations; (b) the reliability and integrity of financial and operational information; (c) safeguarding of assets; and (d) compliance with laws, regulations and contracts. (For further information see, An Inside Look At Internal Auditors.)

Tax Accounting

Tax accounting is based on laws enacted through the legislative process. In the U.S., tax accounting involves the application of Internal Revenue Service rules at the Federal level and state and city laws for the payment of taxes at the local level. Tax accountants help entities minimize their tax payments. Within the corporation, they will also assist financial accountants with determining the accounting for income taxes for financial reporting purposes.

In large, multi-national corporations, tax issues can drive business decisions such as where to domicile certain operations due to differences in the tax rates paid in various countries around the globe versus those assessed in the U.S. At the state level, companies may decide to relocate operations in one state over another due to differences in tax rates and tax-breaks provided as incentives by some states.

Fund Accounting

Fund accounting is used for nonprofit entities, including governments and not-for-profit corporations. Rather than seek to make a profit, governments and nonprofits deploy resources to achieve their objectives. It is standard practice to distinguish between a general fund and special purpose funds. The general fund is used for day-to-day operations, like paying employees or buying supplies. Special funds are established to fund specific objectives, like building a new wing of a hospital.

Segregating resources this way helps the nonprofit maintain control of its resources and measure its success in achieving its various missions.

While non-profits don’t necessarily look to generate a profit, timely and accurate accounting information is needed to ensure that often-scarce financial resources are properly managed and that cash shortfalls that could cause the organization to scale back operations don’t occur.

The accounting rules for federal agencies are determined by the Federal Accounting Standards Advisory Board, while at the state and local level the Governmental Accounting Standards Board (GASB) has authority.

Forensic Accounting

Finally, forensic accounting is the use of accounting in legal matters, including litigation support, investigation and dispute resolution. There are many kinds of forensic accounting engagements: bankruptcy, matrimonial divorce, falsifications and manipulations of accounts or inventories, and so forth. Forensic accountants investigate and analyze financial evidence, give expert testimony in court and quantify damages. Forensic accountants are key players in the investigation of fraud and may be called in if any red flags are detected by a company’s internal financial group or as a result of a routine audit.


Accounting Basics: The Basics
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