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Basics of Accounting

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[Rice University]


- Overview

Accounting is a business language. We can use this language to communicate financial transactions and their results. Accounting is a comprehensive system to collect, analyze, and communicate financial information. 

Regardless of the size of a business, accounting is a necessary function for decision making, cost planning, and measurement of economic performance measurement. Two important types of accounting for businesses are managerial accounting and cost accounting. Managerial accounting helps management teams make business decisions, while cost accounting helps business owners decide how much a product should cost.  

The work performed by accountants is at the heart of modern financial markets. Without accounting, investors would be unable to rely on timely or accurate financial information, and companies’ executives would lack the transparency needed to manage risks or plan projects. Regulators also rely on accountants for critical functions such as providing auditors’ opinions on companies’ annual 10-K filings. In short, although accounting is sometimes overlooked, it is absolutely critical for the smooth functioning of modern finance.


- Accounting as an Information System

Modern accounting is widely recognized as a basic component of business management. Accounting is the means by which managers are informed of the financial status and progress of their companies, thus contributing to the continuing processes of planning, control of operations, and decision making. Accounting provides a method of systematically recording and evaluating business activities.

A large portion of the information that a business manager requires is derived from accounting data. The ability to analyze and use these data helps managers accomplish their activities.

In today's society, many persons and agencies outside of management are involved in the economic life of an organization. These persons frequently require financial data. For example, potential investors need financial data in order to compare prospective investments. Many laws require that extensive financial information be reported to the various levels of government. As an information system, the acoounting process serves persons both  inside and outside an organization.


- Fields of Accounting Activity

Accountants perform many diverse services and are engaged in various types of employment. The three major fields of accounting activity are:
  • Private accounting: Private accounting is commonly called industry accounting. Private accountants are considered internal accountants. They work for a single company and help deal with the financial information of that company. They prepare and analyze reports for an internal manager. Often their work is then analyzed and reviewed by a public accounting firm. The public accounting firm will provide an independent stamp of approval, confirming that the private internal accounting practices meet accounting standards. Private accountants may file tax returns for their organization, perform audits of financial documents, advise on financial and budgetary matters, and more all for their specific company. 
  • Public accounting: Public accounting can also be viewed as external accounting. Public accountants work at a third-party firm and work with clients to review and prepare financial documents that are required to be disclosed to the public. At the simplest level, public accountants work to verify financial documents, reports, and disclosures from an outside perspective. They may help prepare tax returns for individuals and organizations, perform audits for companies, consult, and advise on tax and financial matters. They may be tax or audit specialists within their accounting firm. Public accountants work for a third-party firm that is hired out by businesses and organizations to evaluate their finances. 
  • Governmental accounting: Governmental accounting is a set of unique accounting systems, standards, and processes that support the needs of local, state, and federal governments and their various agencies. As a report by the Governmental Accounting Standards Board (GASB) explains, governmental accounting differs from for-profit accounting out of necessity: “Governments are fundamentally different from for-profit business enterprises in several important ways. Their organizational purposes, processes of generating revenues, stakeholders, budgetary obligations, and propensity for longevity differ. These differences require separate accounting and financial reporting standards in order to provide information to meet the needs of stakeholders to assess government accountability and to make political, social, and economic decisions.” Governments have a different operating environment that presents its own unique considerations. For instance, instead of acquiring and spending funds received from customers or clients as a for-profit company would, governments collect and spend tax dollars in what are known as non-exchange transactions with citizens. This structure places a much greater emphasis on public accountability. Moreover, threats like liquidation, competition, and profitability may be pressing concerns for a private sector organization, but are significantly less relevant in government contexts. Factors that matter more to governments include long-term stability, ability to consistently cover annual expenses and debts, and stewardship of public funds.

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