Accounting Terms Explained
Accounting is a set of business processes that allow corporate leaders to evaluate the performance of operating segments in the short and long terms. Those working in accounting must understand key terms when assuming their responsibilities. Effective accounting controls ensure this and also prevent losses that may result from theft, technological breakdowns and nonconformity to accounting rules.
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Purpose of Accounting
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Accounting is a practice that allows all organizations --- including businesses, nonprofits and government agencies --- to record and report operating data effectively. Good accounting procedures help companies monitor the work of personnel in finance-related departments, such as accounts receivable, vendors payable and treasury departments.
Significance of Accounting
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Accounting terms play an important part in corporate functions because financial reports allow department heads and segment chiefs to assess the economic health of companies in the short and long terms. Without adequate accounting policies, top corporate personnel may be unable to gauge profit indicators and liquidity needs.
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Important Terms
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Although various terms are key to corporate accounting processes, some concepts constitute the foundation of bookkeeping and accounting. These concepts include asset, liability, revenue, expense and equity. An asset is an economic resource that a company owns. Assets include cash, accounts receivable and inventories. Liabilities are debts that an organization must repay and include bonds payable, interest and loans. Revenue is income that a firm generates by selling goods or providing services.
Expenses are charges that the firm incurs through operating activities and include salaries, the costs of materials and rent. Equity constitutes shareholders' investments in a company. Shareholders, also known as stockholders, invest in a company by purchasing corporate shares on financial markets or in private transactions.
Financial Reporting
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Financial reporting is an important activity in modern economies and indicates to external observers --- such as investors, regulatory agencies and financial analysts --- the operating soundness of organizations. This practice also helps companies adhere to U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). Both require that firms prepare four types of accounting reports at the end of each month and quarter --- a balance sheet, a statement of profit and loss, a statement of cash flows and a statement of retained earnings. A balance sheet is also called a statement of financial position or a statement of financial condition.
Management and Financial Accounting
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Although management accounting and financial accounting draw on a similar conceptual framework, both terms are distinct. Management accounting, otherwise known as cost accounting, enables organizations to evaluate manufacturing data and measure corporate profitability through budgeting activities. In contrast, financial accounting has an external orientation, providing a clear picture of a company's economic health to investors, regulators and financial analysts.
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References
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