Question and Answer: Accounting Essentials

Q: What fields of Accounting are essential in running your business?

A:

There are four field of accounting that are essential for the running of any business whether micro, small and medium enterprises or big conglomerate.

They are:

• Financial Accounting
• Management Accounting
• Auditing
• Tax Accounting

Financial Accounting

Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement which comprises of income statement, statement of financial position, (balance sheet) and statement of cash flow. The objective of financial accounting is to provide financial statement to all the stakeholders of the business entity.

 

Financial accounting is also a field of accounting that treats money as a means of measuring economic performance instead of as a factor of production. It encompasses the entire system of monitoring and control of money as it flows in and out of an organization as assets and liabilities, and revenues and expenses.
Financial accounting gathers and summarizes financial data to prepare financial reports such as balance sheet and income statement for the organization’s management, investors, lenders, suppliers, tax authorities, and other stakeholders.

 

Management Accounting

The process of preparing management reports and accounts that provide accurate and timely financial and statistical information required by managers to make day-to-day and short-term decisions.
Unlike financial accounting, which produces annual reports mainly for external stakeholders, management accounting generates monthly or weekly reports for an organization’s internal audiences such as department managers and the chief executive officer. These reports typically show the amount of available cash, sales revenue generated, amount of orders in hand, state of accounts payable and accounts receivable, outstanding debts, raw material and inventory, and may also include trend charts, variance analysis, and other statistics.

Auditing

Financial auditing is the process of examining an organization’s (or individual’s) financial records to determine if they are accurate and in accordance with any applicable rules (including accepted accounting standards), regulations, and laws.

External auditors come in from outside the organization to examine accounting and financial records and provide an independent opinion on these records. Law requires that all public companies have their financial statements externally audited.

Internal auditors work for the organization as internal employees to examine records and help improve internal processes such as operations, internal controls, risk management, and governance.

Accounting and auditing are both essential business functions which, while distinctly different concepts, can interrelate at times. Small business owners must set up an accounting system before they open their doors to manage and record financial data, but auditing is generally reserved for larger or more established businesses. Understanding the definitions of accounting and auditing, as well as the correlation between the two, is vital to understanding business finance.

Tax Accounting

Tax accounting consists of accounting methods that focus on taxes rather than the appearance of public financial statements. Tax accounting is governed by the Internal Revenue Code which dictates the specific rules that companies and individuals must follow when preparing their tax returns.

All these areas of accounting are necessary tools that all businesses need to employ to enhance their profitability and grow their businesses.

However, this can only be used effectively when there is proper record keeping of business transactions.