Accounting creates a logical picture of the financial health of a company and its performance that acts as a stimulus for strategic growth and resource management. It is, therefore, the process of capturing, classifying, and encapsulating financial transactions. Hence, the purpose of this paper is to introduce what basic accounting entails to a team that has no formal accounting training.
Entity concepts explain the nature of transactions an organization should record. It separates the owners of a business and the organization itself such that only the transactions accrued by the organization should be recorded (Tayler et al., 2023). The expenses incurred by the owners outside the organization or for personal use, therefore, do not affect the financial statements of a company not unless the resource (money) is drawn from the company, which will be recognized as ‘drawings’ in the company’s financial statements.
The reliability concept states that the financial transactions recorded should always be accurate and relevant. In this case, correct financial information recorded provides an accurate and fair view of the financial position of an organization to all its stakeholders, influencing their decision-making. The cost principle requires an individual to capture the assets, liabilities, and equity transactions at their original purchase cost.
Financial accounting creates financial reports for external stakeholders and government agencies. It involves the exercise of summarizing and reporting financial transactions and cash flows following the regulations of the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) (Tayler et al., 2023).On the other hand, Managerial Accounting is also similar to Financial Accounting in its preparation and presentation. However, the financial statements and reports prepared are reserved for internal use to facilitate managerial sound business decision-making.
Cost Accounting involves tracking, analyzing, and comprehending the expenses (all direct and indirect) involved in a particular business activity on a day-to-day operation (Tayler et al., 2023). The essence of this concept is to ensure that money is spent on items that benefit the business’s bottom line. The Internal Revenue Service regulates tax accounting. Tax Accounting helps track and report income and costs related to the company taxes to ensure that instances, where taxes are paid in deficit or excess are avoided.
Financial statements are reports that provide the summarized accounting transactions of an organization and are categorized into four primary categories: income statement, statement of financial position (Balance sheet), statement of owners’ equity, and cash flows. The income statement summarizes the income and costs for a specific period. It utilizes the revenue and expense recognition concept that matches the income and their related costs such that they are reported in a similar period. Excesses of expenses over income result in net loss, while excesses of income of costs result in net profit, earnings, or net profit. The statement of owners’ equity summarizes changes in the proprietor’s equity for a particular period. The income statements, hence, supersedes the statement of financial position as the figure of the proprietor equity, whether profit or loss, is reported in the statement of financial position. Due to the above reason, the income statement is viewed as an interlink between the balance sheet and the income statement.
Statement of financial position (balance sheet) summarizes the amounts of assets, liabilities, and owners’ equity owned or owed by an organization. The assets include properties, plants and equipment, cash in hand and at the bank, debtors, prepaid expenses and insurance, patents, and other assets owned by a company. On the other hand, the liabilities include payables, loans, and deferred tax. Statement of cash flows records the movement of cash and cash equivalents of an organization in a given period, and it is divided into three categories: cash flows from operating, investing, and financing activities. Operating activities cash flows outline a summary of cash payments and receipts from operations, and its net cash flow differs from the net income from the income statement. The deviation arises since income and costs may not be recorded simultaneously when money is received from a client or when it has been paid to the payables.
On the other hand, cash flows from investing activities record cash transactions emanating from the sale and acquisition of fixed assets. Cash flows from financing activities record cash transactions concerning the cash investments by the proprietor, debts, and owner drawings. The order in which the financial statements are prepared is as discussed, starting from the income statement, statement of owners’ equity, balance sheet, and finally, the cash flows as they are interrelated.
Ethics in financial reporting is a crucial element as the information disseminated is essential for the decision-making of the information users. In this case, the information prepared and reported must be relevant, reliable, and timely since it influences the type of decision to be made. Thus, individuals responsible for preparing this information (accountants) need to conduct themselves with ethics, such that the information they prepare and supply to the users is considered without any reasonable doubt to be trustworthy to catalyze decision-making. Moreover, the executives and the employees should also behave ethically, as the organization’s growth depends on it. For example, no one will be willing to borrow or invest in a corrupt organization as there is zero certainty on the return on investment. Ethics, therefore, is defined as the moral concepts that pilot the conduct of people whose breach may result in fines, lawsuits, terminations, and criminal prosecutions. Ethics, therefore, act to regulate the irregularities that may arise in the preparation of financial statements to ensure that the providers of the reports portray accurate and fair views.
Reference
Tayler, W. B., Jones, J. P., & Warren, C. S. (2023). Accounting. Cengage Learning.
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