This paper reviews different literature works to evaluate the real meaning of accounting. This paper defines accounting from scratch in order to give comprehensive information for those who do not even know about this field. Further, this paper describes accounting, its reporting procedure, financial statements and their purpose. In addition to that, this paper defines various types of accounting systems that are used around the world by different types of organizations.
Accounting is considered as the language of business, which tells the financial position an organization. It is a systematic way to record, summarize and analyze the monetary values of an organization (Smith, pp. 148–157). Money is the first and foremost need of any business, and there are a number of other things that are connected to acquisition and expense money. In order to keep a day-to-day record of every financial transaction, accounting is being used around the world. The financial transactions include various things such as sales, revenues, expenses, liabilities, and withdrawals. The system of accounting ultimately makes two primary financial statements: balance sheet and income statement, both of these include financial information for the whole year. This financial information is used by internal users like managers and employees in the company and by external users like investors, banks, labor unions, financial analysts and more. The financial statements are tools to evaluate company’s financial conditions; these statements decide whether the company’s stock is going to increase or decrease. Resources are also allocated by using the accounting data that is carried out by financial statements (Financial Statements, pp. 776-86). Management of the company publishes these financial statements to give information to other parties who may be interested to invest in the company or in order to get loans from banks. Beside these two primary financial statements, a number of other financial statements can be made according to need such as expenses report, sales forecast, revenues reports and more.
Investors and creditors mainly consider the financial conditions of a company, because they must know about the financial condition of a company before investing or lending money. The financial statements provide them an idea for both the safety and profitability of their investments. Creditors and investors always want to know that where the money was invested and what is its status. The financial statements give them answers to all their questions. Stating outstanding debt and equity components of the company, balance sheet enables debt and equity investors to have a better idea of their relative positions in a company’s capital mix. Income statement consists of the detail of revenues, expenses, and net profit, but not the detail of cash flows. Various cash inflows and outflows occur in the company during a specified period such as investing and financing; this is critical information for investors. In this regard, cash flow statements are prepared separately to ensure the investors that company has enough potential to deal with all expenses and pay rewards for their investments. Equity investors also remain curious to know about their share in the entire equity of company; therefore, the statement of shareholders’ equity is made. It shows various changes that have occurred during a specified period in various equity components such as retained earnings. When total liabilities of a company are subtracted from total assets, the result comes as the amount of shareholders’ equity. The shareholder’s equity of a company can grow by increasing retained earnings and utilizing them in a proper way instead of expanding shareholders base.
As the number of sectors such as social, government and private increased in the world, they all needed a separate type of accounting system that fits their needs. In this regards, authors have defined various accounting systems. These all are defined differently, because of having different criteria to evaluate a specific system. Financial Accounting is the basic accounting system that helps an organization to evaluate its financial position and publish financial statements, mostly for external use (Stice, and James D Stice, N.p.). The financial statements give a detailed report on previous performance and current position, which are concluded by following GAAP (Generally Accepted Accounting Principles). Management accounting system focuses to build financial statements that are primarily used by company’s management. The financial statements in management accounting contain more detailed information than those statements, which are produced for external use. Management uses these statements for making effective decisions and controls the organization more efficiently (Quinn, et al., N.p.). The information can be about budgets and forecasts that will enable the management to plan effectively for future or about an assessment of past performance and results that will enable the company to concentrate more on lacks. Management accounting also includes cost accounting that is a useful tool to monitor and control costs. The cost accounting is mostly used in the manufacturing department of companies.
Governmental accounting is also a type of accounting that is mainly used in public sector organizations. This accounting system is slightly different from financial accounting systems because the public sector has somehow different aims and procedures than private sectors. Governmental accounting is used to evaluate the financial performance and position of public sector entities in order to ensure that they are going on the right path as was described in the budget. Government’s main concern is to collect revenues from different departments and set budgets for the public sector entities. This accounting system helps government to evaluate budget and revenue related activities. Tax Accounting is another type of accounting system that evaluates all tax related matters by using financial formulas. Tax rules are set separately in every jurisdiction by government and tax calculations are carried out accordingly (Anderson, and W. Eugene Seago, pp. 1153-164). These rules often differ from the standard rules for financial accounting such as GAAP, because the government collects most of the taxes and it can change rules according to needs. In this connection, tax accountants keep in mind the tax laws while preparing the financial statements in tax accounting. These financial statements are used by tax professional in order to evaluate the tax obligations of a company.
Forensic Accounting is one of the interesting types of the accounting system; it deals with cases of litigation or disputes. Forensic accountant’s use different accounting, auditing and investigative techniques to assess the loss or detect the financial fraud. Whether the case is over civil or criminal dispute over financial terms in the court of law, the accountants play the role of expert witnesses. The situations where forensic accountants play a key role include personal injury claims, insurance claims, suspected fraud, and business valuation as well as other objections of professional carelessness in a financial issue. Another type of accounting system is Project Accounting, which deals with the financial progress of projects. It uses accounting techniques to evaluate financial progress and position of a project. It is a part of management accounting, and it plays a vital role in project management. Project accounting mainly focuses to ensure the financial achievement of the project of a company such as a marketing campaign. It is also a source of competitive advantage for all those businesses, which work on different projects. The last type of accounting system in this series is Social Accounting; it is also called Corporate Social Responsibility Reporting and Sustainability Accounting. This accounting system deals with the evaluation of impacts of an organization’s performance on natural and social environment. Furthermore, social accounting helps creating Environmental Reports that shows the environmental impacts of a company including its annual report. This type of accounting has not grown yet but is performing well in its field; however, growing environmental consciousness ensures the development of social accounting.
Accounting is a systematic process that records, summarizes and interprets the financial information of a company. It evaluates the financial position and performance by making financial statements. The financial statements show the position of a company's assets, liabilities, and revenues, expense, and equities. Investor and creditor mostly use these statements to ensure whether to invest in an organization or not. If they have invested already, they will ensure the current position of their investments. With increasing consciousness, people are separating organizations according to their functions and each organization needs an accounting system according to its needs. In this regard, accounting systems is divided into different types such as Financial, Management and Governmental Accounting, which are uses around the world.
"Financial Statements." Review of Income and Wealth 57.4 (2011): 776-86. Web.
Anderson, Kevin D., and W. Eugene Seago. "Tax Accounting." The Tax Lawyer 54.4 (2001): 1153-164. Print.
Quinn, Martin John et al. Management Accounting. McGraw-Hill Higher Education, 2013. Web.
Smith, Charles H. “A New Introduction to Accounting: Some Explanations.” The Accounting Review 48 (1973): 148–157. Web.
Stice, Michael A. Diamond Earl K, and James D Stice. Financial Accounting. Southwestern College Pub, 2000. Web.