Accounting Is A Body Of Principles And Conventions Accounting Essay

Category: Accounting

I would like to talk about accounting in this paper. The main goals of this project are to define the purpose of accounting, to identify the four basic financial statements and to clarify how they are interrelated with each other, and why they are so important to their users, such as managers, investors, creditors, and employees.

The word accounting have appeared many years ago and all types of organizations can not exist without accountants nowadays, moreover, accounting is major part of the business environment and it greatly influences on the functioning of the company. Do you know that the notion accounting is very often associated with business structures and usually referred to "the language of business"? Thus, we see that accounting is a business discipline that deals with financial information in contemporary world. Defining the term accounting we see that Kaliski (2006) said that "Accounting is a body of principles and conventions as well as an established general process for capturing financial information related to an entity's resources and their use in meeting the entity's goals. Accounting is a service function that provides information of value to all operating units and to other service functions, such as the headquarters offices of a large corporation." The main purpose of accounting is to identify, fix and record the whole variety of activities that impacts the organization financially. In other words, the role of accounting consists in maintaining and processing of all necessary economic and financial data that are used for different aims in one or another organization.

Comiskey & Mulford (2000) mentioned that accounting is divided into two main branches, one of them is managerial accounting and another one is financial accounting. Analyzing managerial accounting we see that it deals with the procedures and processes in the area of internal decision making process and reporting within organization. Financial accounting, in its turn, is referred to the fundamental policies, procedures, regulations and guidelines mandated by the Generally Accepted Accounting Principles (GAAP). According to Weygandt (2008), "the accounting profession has developed standards that are generally accepted and universally practiced. This common set of standards, called generally accepted accounting principles (GAAP), indicate how to report economic events."

Beginning the discussion of financial statements we see that GAAP requires four primary financial statements: the first one is income statement, the second one is balance sheet, the third is retained earnings statement, and the last one - statement of cash flow. Kaliski (2006) stated that "Financial statements provide information of value to company officials as well as to various outsiders, such as investors and lenders of funds."

Shortly describing each of four primary financial statements Weygandt (2008) stated that "An income statement presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time. A retained earnings statement summarizes the changes in retained earnings for a specific period of time. A balance sheet reports the assets, liabilities, and stockholders' equity of a company at a specific date. A statement of cash flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time." Thus, it becomes obvious that all these statements should be prepared in time, and have an annual, quarterly or monthly basis.

Taking into account the above stated information it is almost impossible to overestimate the necessity of financial statement for the users, such as managers, present and potential investors, creditors and employees. All these categories of users use financial statements for the purpose of to receive data of their specific needs in work and development.

Observing these needs of every group we see that managers are interested in the information presented in the financial statements due to their control, planning, developmental and decision-making responsibilities. They need to know all information about the company and professionally react on all changes in time.

Investors are always thinking about their investments and they should control own risks and profits. Moreover, timely received information helps them to buy, hold, sell or make any other operations with their assets. Shareholders are interested in the ability of the company to pay high dividends, for example.

Thinking about employees we see that their aim is to take care of own employers and exactly financial statements give them possibility to control the profitability and stability of the last. Having the information about the activity of organization employees can improve employment opportunities; provide remuneration and other necessary operations.

Creditors, in their turn, like to calculate their advantages, thus, financial statements allow them to determine whether their loans will be paid in time or it is necessary somehow answer the situation.

To sum up, it is necessary to say that we discussed the term accounting, defined its purpose and identified the four basic financial statements. The necessity of accounting and financial statements in contemporary business reality was also discussed with all important explanations and examples.