Role of accounting
Accounting plays a major role in running the financial matters of a business enterprise. This involves qualified personnel preparing financial statements to guide the business in the decision-making process (Bartov & Mohanram, 2014). Such decisions involve transactions with government agencies, stockholders, employees, banks, suppliers, and business owners (Webster, 2003; Thukaram, 2007). Accounting deals with both internal and external transactions in a business entity. This takes care of all the interested parties who make important business decisions based on available accounting information. Besides, these parties play important roles in generating key statements that address the profit and loss or P&Ls (Bartov & Mohanram, 2014). These P&Ls reflect details of previous transactions over a period. Such information is what we call the accounting information.
Accounting information is the process of identifying, recording, and communicating relevant, reliable, and comparable information about all business activities in an organization (Webster, 2003).
Users of financial information
Several individuals and groups use accounting information for different purposes to enhance transactions. Investors and creditors use financial information to assess the performance of the company (Maines & McDaniel, 2000). This helps them assess whether they made profit or loss. This guides them in deciding whether to continue investing in the company or channel their funds to other uses. It is a requirement of all the business entities to provide their business information to several government agencies from the federal, the state, or the local government for accounting processes (Thukaram, 2007).
Accounting process
It is also called the accounting circle. This is defined as a series of events that begins with the initiation of the transaction process and closes when books are formally closed. The summary of that process is listed below (Webster, 2003; Maines & McDaniel, 2000).
- Identity of transactions and events
- Preparation of the transaction source documents
- Analysis and classification of the transactions
- Recording transactions through the entry to the relevant journals like the general journal, cash-receipt, purchase, cash, or sales journals
- Posting of the entries from the general journal to the ledger accounts
- Preparation of the trial balance and enter entries in the ledger account. Ensuring both sides are equally balanced.
- Correction of any discrepancies in the trial balance
- Preparation of the adjusting entries for the recording of the estimated amount, deferred, and accrued values
- Posting of the adjusting entries to the ledger accounts
- Preparation of the adjusted trial balance following steps for the preparation of trial balance
- Preparation of the financial statements (statement of financial position, cash flow statement, statement of retained earnings, and income statement)
- Preparation of the closing journal entries to close temporary accounts like the deferred tax, expense accounts, losses account, revenue account, and gain account
- Posting of the closing journal entries to the ledger account
- Preparation of the ‘after closing trial balance.’
- Preparation of the reversing journal entry (this is optional)
Role of financial accounting versus the management accounting
Financial information is important to those inside and outside the organization. Management accounting is helpful to those within organizations because it helps in running their companies. It provides analysis and information to the financial professionals inside the business entity like the managers and the owners (Webster, 2003; Thukaram, 2007; Maines & McDaniel, 2000).
The statement of comprehensive income (income statement) and statement of financial position (balance sheet)
The statement of comprehensive income (income statement)
The IAS gives a guiding difference in how to report income and the expenses accrued in a given period. This allows experts to report the expenses and the income by using either a statement of comprehensive income (a single statement) or two separate statements. The income statement includes the components of profit and loss. Example of line items in comprehensive income includes actuarial losses and gains, losses and gains from foreign operations, investments in equity, hedging instruments, and revaluation surplus changes (Webster, 2003; Maines & McDaniel, 2000).
Statement of financial position (balance sheet)
A balance sheet is a document providing an overview of entity finances over a period. These are routinely used by small and large companies as well as personal finances. The two main areas of the statement of position cover the assets (like cash at bank, cash in hand, and real estate) and liabilities (funds of the company owned by other people) (Webster, 2003; Thukaram, 2007). It breaks statements into various sections for ease of reference when searching for topics of interest.
The difference between the cash basis and the accrual basis of accounting
A cash basis and accrual basis differ in their timing period that recognizes the expenses and the revenue. Personal finances and small businesses prefer using the cash basis. It accounts for the expenses when funds are paid out and for revenues when funds are received (Bartov & Mohanram, 2014). Accrual is the commonest method employed by many businesses (Thukaram, 2007).
References
Bartov, E., & Mohanram, P.S. (2014). Does income statement placement matter to investors? The case of gains/losses from early debt extinguishment. The Accounting Review, 89(6), 2021-2055.
Maines, L.A., & McDaniel, L.S. (2000). Effects of comprehensive income characteristics on nonprofessional investors’ judgments: The role of financial statement presentation format. The Accounting Review, 75(2), 179-207.
Thukaram, R.M.E. (2007). Management Accounting. New Delhi: New Age International.
Webster, W. (2003). Accounting for Managers. London: McGraw Hill Professional.