Guide To Basic Accounting

Accountancy (profession) or accounting (methodology) is the measurement, disclosure or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies, organizations, and public agencies. The terms derive from the use of financial accounts.  Accounting is the discipline of measuring, communicating and interpreting financial activity. Accounting is also widely referred to as the "language of business".  The day-to-day record-keeping involved in this process is known as bookkeeping.

Financial Accounting

Financial accounting is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, government agencies, owners, and other stakeholders. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance and reporting the results to interested users.   Historically, it has involved processes by which financial information about a business is recorded, classified, summarized, interpreted, and communicated; for public companies, this information is generally publicly-accessible.

Financial accounting is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. Financial accountancy is governed by both local and international accounting standards. Financial accountants produce financial statements based on Generally Accepted Accounting Principles (GAAP) of a respective country.  Financial accounting serves following purposes:producing general purpose financial statements; provision of information used by management of a business entity for decision making; and planning and performance evluation for meeting regulatory requirements.

Managerial Accounting

Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions. Unlike financial accountancy information (which, for public companies, is public information), management accounting information is used within an organization (typically for decision-making) and is usually confidential and its access available only to a select few.  Managerial accounting assists management in formulating strategies; planning and constructing business activities; making decision; Optimizing use of resources; supporting financial reports preparation; and safeguarding assets.

Accounting Methods For Taxation

Each taxpayer must use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it, regardless of when payment is received, and deduct expenses in the tax year you incur them, regardless of when payment is made.  For a complete discussion refer to the Internal Revenue Service Publication 538, Accounting Periods and Methods.

Auditing

Auditing is a related but separate discipline, with two sub-disciplines: internal auditing and external auditing.  External auditing is the process whereby an independent auditor examines an organization's financial statements and accounting records in order to express an opinion as to the truth and fairness of the statements and the accountant's adherence to Generally Accepted Accounting Principles (GAAP), or International Financial Reporting Standards (IFRS), in all material respects. Internal auditing aims at providing information for management usage, and is typically carried out by auditors employed by the company, and sometimes by external service providers.

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