The Purpose of Accounting Information
Accounting has often been called the language of business. It has earned this designation as companies use financial information to deliver information in a universal manner for review by internal and external users. Accounting information also allows individuals to compare companies from different business industries or sectors by reviewing their specific financial information or statements. Most companies prepare accounting information using specific time periods, such as monthly or annually.
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Types
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Two types of accounting methods may be used to prepare financial information: management or financial. Management accounting does not follow any specific guidelines or standards and is usually prepared for internal review during business decisions. Companies use management accounting to collect internal business information relating to the company's cost of producing goods or services. Financial accounting follows national accounting principles and is prepared for internal and external users interested in information, such as sales revenues, gross profits, assets, liabilities or other important information.
Function
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Accounting information helps individuals understand how well the company uses its economic resources or business inputs to produce goods and services. This information helps business owners understand their company's profitability and helps lenders or investors determine if they want to invest money in the company for a future financial return. Financial accounting information is usually the best way for companies and investors to determine the overall financial health of businesses.
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Features
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Financial accounting prepares the company's information into three basic financial statements: the income statement, balance sheet and statement of cash flows. The income statement lists information regarding the company's sales to consumers or other businesses, the cost of goods sold, money spent to produce these sales and the company's net profit. The balance sheet presents a snapshot of the company's current financial wealth by listing all assets and liabilities owned by the business. The statement of cash flows shows how well the company earned cash during specific time periods.
Considerations
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Companies may choose to implement a computerized accounting software system to enhance their financial information reporting capability. Automating accounting systems can help companies ensure that financial information is collected in an accurate and timely manner. Accounting software is usually customizable depending on the size and scope of the company's financial information and business operations. The ability to transfer accounting information electronically can also allow companies to operate multiple locations in various domestic or international geographic economic markets.
Expert Insight
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Financial accounting information is governed by the Financial Accounting Standards Board (FASB), a private sector organization responsible for developing generally accepted accounting principles (GAAP). GAAP is the national accounting standards companies are required to use when reporting financial information to internal and external users in the United States. Publicly held companies are also required to meet the accounting standards created by the Sarbanes-Oxley Act of 2002 and other requirements issued by the U.S. Securities and Exchange Commission (SEC).
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