Accounting is a term derived from financial accounts and is a key element of management. It is the art of recording and analyzing financial transactions, identifying, measuring and communicating economic and financial information mainly used by lenders, managers, investors, tax authorities and other decision makers to make resource allocation decisions between and within companies, organizations, and public agencies. Accounting is used in all types of organizations including, for profit companies, non-profit organizations and governmental organizations. An accounting system is used for both, internal and external reporting to managers for planning and control and for making special decisions, policies, and long-range plans. It classifies and summarizes in a significant manner financial transactions and events in terms of money.
There are two main objectives of accounting, to determine the profit or loss earned by the firm and to identify the financial position of the firm. There are three standard types of accounting systems, namely Financial accounting, Management accounting and Tax accounting, which are bookkeeping methods involved in making a financial record of business transactions and in the preparation of statements concerning the assets, liabilities, and operating results of a business.
Financial accounting provides a standard view of an organizations past performances and is primarily for the external decision maker. It primarily involves double-entry bookkeeping system, that is, making at least two entries for every transaction, namely, a debit in one account, and an equivalent credit in another account. This type of accounting system also has to ensure that the sum of all debits should always equal the sum of all credits, providing a simple way to check for errors. Financial accounting information is generally publicly-accessible.
Management accounting is basically meant for internal decision makers. Management accounting information is mainly used within an organization and is generally confidential and accessible only to a small group, mostly decision-makers. The information is usually used for decision making, planning and control. Sun an accounting system emphasizes the future scenario of an organization and is not governed by generally accepted accounting principles.
Tax Accounting is the accounting needed to comply with jurisdictional tax regulations. It is an accounting specialization focusing on tax preparation and planning. Tax accounting method is mainly used for computing tax deductions, taxable income, which includes gross income less deductions. There are two common tax accounting methods, namely, cash method, wherein tax deductions are taken when expenditures are made and accrual method, wherein tax deductions are taken when there is a fixed and determinable liability regardless of when cash is paid.
