What is accounting

Accounting has been called “the language of business” Perhaps a better term is “the language of financial decisions”. The better you understand the language, the better you can manage the financial aspects of living. Personal financial planning, investments, loans car payments, income taxes, and many other aspects of daily life are based on accounting. A recent survey indicates that business managers believe it is more important for college students to learn accounting than any other subject. Other surveys show that persons trained in accounting and finance make it to the top of their organizations in greater numbers than persons trained in any other field. Indeed, accounting is an important subject.

Accounting is the system that measures business activities, processes that information into reports and communicates these findings to decision makers. Financial statements are the documents that report on an individual’s or an organization’s business in monetary accounts.

Is our business making a profit? Should we start up a new line of women’s clothing? Are sales strong enough to warrant opening a new branch outlet? The most intelligent answers to business questions like these use accounting information. Decision makers use the information to develop sound business plans. As new programs affect the business’s activities, accounting takes the company’s financial pulse beat. The cycle continues as the accounting system measures the results of activities and reports the results to decision makers.

USERS OF ACCOUNTING INFORMATION

People use accounting information in day-to-day affairs to manage their bank accounts, to make investments, and to decide whether to rent or to bur a house.

Managers of businesses use accounting information to set goals for their organizations, to evaluate their progress toward those goals, and to take corrective action if necessary. Decisions based on accounting information may include which building and equipment to purchase, how much merchandise inventory to keep on hand, and how much cash to borrow.

Investors and creditors provide the money that businesses need to begin operations. To decide whether to help start anew venture, potential investors evaluate what income they can reasonably expect on their investment. This means analyzing the financial statements of the new business. Those people who do invest monitor the progress of the business by analyzing the company’s financial statements and by keeping up with its developments in the business press.

AUDITING

Not so many years the presence of an auditor suggested that a company was having difficulties or that irregularities had been discovered in the records. Currently, however, outside audits are a normal and regular part of business practice. Independent auditors are employed by a company’ board of directors to supply the stockholders with the result of checking the financial statements, in order to prove that annual reports are fair representations of the financial position of the company. Performing his work the auditor should follow several principles and assumptions: the company’s accounts must represent a true financial position; generally accepted accounting principles have been use at all accounting steps and accounts can be compared with those of similar companies; the proper amount of information is disclosed in the financial statements. As a result, the auditor’s opinion should be based only on facts and it must be objective. Auditors are expected to maintain a relationship of strict independence and professionalism with the companies for whom they work, so they mustn’t hold shares in these companies. On the other hand, the auditor should respect the client’s confidence, so having the access to some private information; the auditor mustn’t spread it outside. On the other hand, he should think of public interests, that is why he must publish his opinion in a standard form and the information is to be clear to the stockholders. But he must always carry out his duties under the law and inform authorities about fraud.

Thus the auditors review financial records and report to the management on the current state of the company’s fiscal affairs in the form of auditor’s Report or Auditor’s Opinion.