Accounting in simple terms
Accounting is the methodology by which business activities are measured, processed into reports, and results are communicated to decision makers. Accounting has been called the language of business. The better the language is understood, the better you can manage the financial aspects of everyday living. Business managers reported in a recent survey that they considered accounting as the single most important college class for business majors to master.
Car payments, personal budgeting, income taxes are all based on information systems developed from accounting reports and principles. Accounting reports allow people to make informed decisions on business matters. Financial statements are reports that display business of an individual or corporation in monetary amounts.
Bookkeeping is not the same as accounting. Bookkeeping merely is the process of collecting information to be used in accounting. Today, much of the bookkeeping processes are being done by computer software programs. The decisions based on the accounting reports still must be made by people.
Some of the people who use accounting information are the decision makers. The need for accurate information cannot be downplayed. The bigger the decision, the more accurate the information must be. Some of the people and groups who use accounting information include individuals, businesses, investors and creditors, governmental regulatory agencies, taxing authorities at all levels, non profit organizations, and sometimes employees and labor unions.
Accounting follows several different paths in presenting reports. The accounting reports may be prepared for management. Management accounting helps in making business decisions about internal direction and needs of the business or corporation. Financial accounting is usually intended for a broader audience, such as shareholders, lenders, or regulatory agencies as well as taxing agencies.
Auditing is related to accounting and also has two main types. Internal auditors work within an organization to ensure that accounting practices follow Generally Accepted Accounting Principles (GAAP), which are standardized format and policy for accounting transactions and reports. These guidelines might set standards for how inventory usage is to be recorded, for example first in/first out, last in/in first out etc. This can make a significant difference in determining the value of the inventory to be reported on the financial statements.
External auditors are those hired by agencies such as the government to check on the activities of the accounting reports prepared by the business or organization. An audit report is a report that the business has or has not presented the financial reports so as to correctly represent the status of the business.
by Nathan.Smarty 19 years ago