why do we need financial and managerial accounting
Accounting s Importance to Business So why do we need accounting? Asking that question of an accountant is like asking a farmer why we need rain. PWe need accounting because it s the only way for business to grow and flourish. PAccounting is the backbone of the business financial world. PAfter all, accounting was created in response to the development of trade and commerce during the medieval times. Italy is our first recorded source for accounting entries, and the first published accounting work in 1494 was by a Venetian monk. PSo you see accounting as an organized method for record-keeping has been around almost as long as the trade and business industries. PAnother interesting fact is the knowledge and principles upon which the first accounting practices were established, have changed very little in the many hundreds of years that accounting has been in use.
PThe concepts of assets, liabilities, and income and the need to reconcile these areas is still the basis for all accounting functions today. The process for recording those transactions, and the many reports generated by the compilation of that information has evolved over the last two hundred years. PThanks to the creation of computers, many of the bookkeeping functions that are vital to accounting, but somewhat repetitive are performed by data entry clerks, and the reports generated come from the IS Department. PThe end result is still the same: accounting gives us the financial snapshot we need in order to make solid business decisions about the current status or projected future health of our businesses. There are two basic categories of accounting: financial accounting and managerial accounting.
PFinancial accounting is comprised of information that companies make available to the general public:Pstockholders, creditors, customers, suppliers, and regulatory commissions. PManagerial accounting deals with information that is not made public. PInformation such as salary costs, Cost of goods produced, profit targets, and material control information. PThe knowledge supplied by managerial accounting is for the use of department heads, division managers, and supervisors to help them make better decisions about the day-to-day operations of the business. Now, what about the accountability part of the accounting process? PWhy do we need that and how do we enforce it? PBusinesses need to be held accountable for the methods they use to run a business because the potential for greed, theft, and dishonesty exist in every business.
PYou have only to read the current events section of the newspaper to realize how rampant corporate abuse is in business today. PWe have Enron, HealthSouth, and Martha Stewart examples to show us just how extensive the problem has become. PThere are specialized areas of accounting, that when correctly enforced, eliminate the possibility for fraud. PAuditing and income taxation, when used correctly, force business to account for all business income, transactions, and transfers, and then to pay their fair share of the tax burden. PThe catch here is that the principles must be correctly enforced. Accounting is the conscious of the business world. PWhen handled with care and with respect, it performs as expected. PWhen abuse occurs, and the system is circumvented or overridden because of dishonesty and greed, it doesn t work correctly.
Accounting is much like all other systems in place, they are only as good as the people using them.
Management and financial accounting reports, while each used in different settings, provide their recipients with benefits that are unique to each format. Management accounting reports provide estimates for what might happen in the future. A manager needs projections and would rather use estimates on what will happen than reports on what has already happened because of the ever-changing financial terrain in business. This type of accounting often benefits the future of a company. Investors and tax professionals need hard facts based on numbers that already exist, so they can properly assess a company's performance. Financial accounting reports provide the precision these professionals need to gauge the solidity of a company.
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