In this post, I want to talk briefly about accounting, the language of business. Every business person should have basic notions of accounting as it gives you a good insight into how businesses operate. Accounting is the process of measuring and summarizing business activities, interpreting financial information and communicating the results to management and other decision makers. It is an information system that provides reports to users about the economic activities and condition of a business.
Accounting information is used by two different users, internal users (managers and employees) and external users (investors, creditors, customers, government). All accountants identify quantitative information (business transactions), record it in a systematic manner and report that information using financial statements. The information they provide must be trustworthy and useful for decision-making.
List of financial information users:
- Owners and Managers (report cards).
- Investors and Creditors (how business is performing).
- Government Agencies (SEC & IRS).
- Employees and Labor Unions
- Job seekers
Based on the group that uses that information, accountants work in two major fields:
Financial accountants are responsible for preparing the organization Financial Statements, including income statement, owner’s equity statement, balance sheet and statement of cash flows. In them, you will find a summarize of the company performance. The objective is to provide relevant and timely information for the decision-making needs of external users. All publicly traded companies must make their financial statements public.
Reports are flexible and tailored to the needs of individual managers. Their main goal is to help them in making decisions based on relevant information, like how much they earn in sales, if there is profit in this accounting period, liquidity of the company, etc. Information is used by managers and owners, not for external users. Reports contain information from all functional areas (marketing, human resources, operations) and guide managers in taking corrective actions.
Agencies in Accounting
In the United Stated, accountants adhere to GAAP (Generally Accepted Accounting Principles), is a report with numerous industry-specific accounting rules issued by an independent agency called FASB (Financial Accounting Standards Board). Reports made with GAAP can be used to compare companies. If you live outside the United States, the system accountants use is IFRS (International Financial Reporting Standards). Those principles are developed and adopted by the IASB (International Accounting Standards Board).
There are other agencies involved:
- SEC: Securities and Exchange Commission, a federal agency that regulates stock trades and which is in charged with ensuring that companies tell the truth with their financial positions.
- IRS: Internal Revenue Service, a federal taxing agency. Audit businesses for tax liabilities and compliance.
Top managers are now being held responsible for the financial statements issued by the people who report them.