Accounting is the measurement, processing, and communication of financial information about economic entities. such as businesses and corporations. The Italian mathematician Luca Pacioli established the modern field in 1494. Accounting, which has been called the “language of business”, measures the results of an organization’s economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants. The terms “accounting” and “financial reporting” are often used as synonyms.
Accounting can be divided into several fields including financial accounting, management accounting, external auditing, tax accounting, and cost accounting. Accounting information systems are designed to support accounting functions and related activities. Financial accounting focuses on the reporting of an organization’s financial information, including the preparation of financial statements, to external users of the information, such as investors, regulators, and suppliers and management accounting focuses on the measurement, analysis, and reporting of information for internal use by management. The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is the most common system.
Accounting has several subfields or subject areas, including financial accounting, management accounting, auditing, taxation, and accounting information systems.
Financial accounting focuses on the reporting of an organization’s financial information to external users of the information, such as investors, potential investors, and creditors. It calculates and records business transactions and prepares financial statements for external users following generally accepted accounting principles (GAAP). GAAP, in turn, arises from the comprehensive agreement between accounting theory and practice, and change over time to meet the needs of decision-makers
Management accounting focuses on the measurement, analysis, and reporting of information that can help managers in making decisions to fulfill the goals of an organization. In management accounting, internal measures and reports are based on cost-benefit analysis and are not required to follow the generally accepted accounting principle (GAAP). In 2014 CIMA created the Global Management Accounting Principles (GMAPs). The result of research from across 20 countries on five continents, the principles aim to guide best practice in the discipline.
Auditing is the verification of assertions made by others regarding a payoff, and in the context of accounting it is the “unbiased examination and evaluation of the financial statements of an organization”
Accounting information systems
An accounting information system is a part of an organization’s information system that focuses on processing accounting data.
Tax accounting in the United States concentrates on the preparation, analysis, and presentation of tax payments and tax returns. The U.S. tax system requires the use of specialized accounting principles for tax purposes which can differ from the generally accepted accounting principles (GAAP) for financial reporting.U.S. tax law covers four necessary forms of business ownership: sole proprietorship, partnership, corporation, and limited liability company. Corporate and personal income are taxed at different rates, both varying according to income levels and including varying marginal rates (taxed on each additional dollar of income) and average rates (set as a percentage of overall income)
Accounting is famously known as the “language of business”. Through the financial statements, the end-product reports in accounting, it delivers information to different users. Accounting is a means through which information about a business entity is communicated.
The American Institute of Certified Public Accountants (AICPA) defines accounting as:
Types Of Accounting:
- Financial accounting. This field is concerned with the aggregation of financial information into external reports. There are several career tracks involved in financial accounting.
- Public accounting. This field investigates the financial statements and supporting accounting systems of client companies, to provide assurance that the financial statements assembled by clients fairly present their financial results and position.
- Government accounting. This field uses a unique accounting framework to create and manage funds, from which cash is disbursed to pay for a number of expenditures related to the provision of services by a government entity.
- Forensic accounting. This field involves the reconstruction of financial information when a complete set of financial records is not available.
- Management accounting. This field is concerned with the process of accumulating accounting information for internal operational reporting.
- Tax accounting. This field is concerned with the proper compliance with tax regulations, tax filings, and tax planning to reduce a company’s tax burden in the future.
- Internal auditing. This field is concerned with the examination of a company’s systems and transactions to spot control weaknesses, fraud, waste, and mismanagement, and the reporting of these findings to management.