Accounting is the method of documenting, gathering, and analysing financial transactions in order to produce information that supports strategic decision. The many financial statement formats used in accounting include the balance sheet, income statement, statement of cash flows, and statement of changes in equity.
Every organization, whether for profit or not, aims to provide the greatest benefit to its owners and investors. This goal cannot be achieved in the absence of a mechanism to monitor the organization’s performance. Accounting is the study of performance evaluation in regards to money, and it may be done on the basis of both financial (i.e., earnings, wealth, etc.) and non-financial (i.e., customer happiness, market share, etc.) aspects.
Accounting consists of two main types based on profession and its practices, these types are:
Management Accounting: The analysis and dissemination of financial data to managers inside firms so they may make educated decisions is the procedure of management accounting. It often entails reviewing financial information, creating financial reports, and offering management recommendations. The majority of businesses need management accounting. All levels of decision-making, from strategic planning to operational management, are informed by it.
Financial Accounting: The area of accounting known as financial accounting deals with the creation of financial statements for decision-makers, including workers, banks, suppliers, investors, and other stakeholders. Balance sheets, income statements, and cash flow statements are all examples of financial statements. Because it offers data that is utilised to make decisions about how to distribute resources, financial accounting is significant. Financial statements, for instance, can be used to determine a company’s profitability and, consequently, whether it is a suitable investment. Financial statements may also be used to determine a company’s liquidity (the amount of money available to pay debts).
Who Uses Financial Statements
Among the entities that examine financial accounts are investors and financial analysts, lenders, employee organizations, suppliers and other business creditors, customers, governments and their agencies, and the general public.
The assets, liabilities, and equity of a corporation are shown on the balance sheet. The income statement of a corporation displays its revenue and expenses. The statement of cash flows shows how a company’s cash has changed over time. The statement of changes in equity shows how a company’s equity has changed over time.
Accounting is important because it provides data that can be utilized to inform business decisions. For investors and financial professionals, evaluating a company’s financial soundness is simplified simpler. It helps lenders decide whether to extend loans to a company. It helps employees assess a company’s ability to pay salaries and offer other benefits. It helps suppliers and other trade creditors assess a company’s ability to pay for goods and services. With its aid, customers may assess a company’s financial stability. It makes it easier for governments and its agencies to evaluate how well a corporation complies with laws and regulations. Additionally, it facilitates the public’s understanding of a corporation’s financial statements.