profession give some right ideas and some wrong ideas. Accounting is a process through which persons come to know the state of the business. It is used by the owners to find out their own performance in the activity they have taken up, by the government to collect the amount of taxes that are due by the investors in order to decide as to whether they should invest in the business, by the lenders to find out whether it is safe and secure to give the business credit, and many others for various needs or purposes. At the same time, it is not essential that all accounts give the right ideas as we can see many big businesses being penalized for wrong statements and manipulating their own accounts. Ultimately they have an objective -- pay as low a figure of taxes as you can. The government also tries to catch them through the accounts, and sometimes, there are different accounts brought out for different audiences. For all the concerned persons, accounts are the beginning and not the end. Accounts are also not the complete truth.
The two main types of accounting are financial accounts and cost accounts. Financial accounts are for determining the performance of the company, whereas cost accounts are to determine profitability of individual processes, products or any other activities of the particular organization. The utility of this process is to determine whether the company should continue on that particular activity. This is required as some activities of every organization have to change as the organization develops. This happens as the costs of the organization and the dreams of the entrepreneurs, as also investors have to change. It is cost accounting which tells them the direction to go. Even for maintaining the basic books of accounts, there are two common forms of accounts -- cash or accrual. The first method is permitted for businesses which have a turnover of less than $5 million, but the moment the turnover goes above that, accrual method of accounting has to be used -- at least for the purpose of reporting to the government. (Basic Accounting Principles)
Designing of accounting systems can be done by any person who is competent to do it. For the purpose of filing tax returns, asking for loans from banks, and other similar activities the accounts have to be prepared in the required manner by chartered accountants, who are the professionals. At the same time, they are not necessarily the best for designing the original system of accounting in the organization as the systems can be designed to give a lot of information about the efficiency and quality of activities of the company. For example, for any service organization it is possible to take each contract separately and determine the earnings/losses on that contract. This will be summed up in the final accounts that are presented, but the individual account will tell the managers about profitable and loss making contracts that they have undertaken. Similarly, it is possible to have sales revenue and cost account for each item sold by a trading organization. That will tell the managers about profits and sales from each, individual product. In a way this will also direct them to losses and possible misuse of individual items. This has become very simple now with computers maintaining records. These decisions have to be taken by the owners/managers of the organization. However, if they are not able to do it, the design of the system may be left to a professional accountant. He will probably design a system that will satisfy statutory requirements. (Bookkeeping and Accounting - From Start to Finish)
The question of users of any information comes from the recipients of the information. Again, accounts are information that can be tailored to the way in which it will look at its best to the person who is looking at it. The first set of external persons who have to look at accounts of a company are the income tax authorities and for them the accounts will have to be prepared in a manner that is specified under the income tax laws. These differ from country to country as also the type of organization and the level of turnover. The next set is the shareholders of a limited company. These persons have to be supplied a set of accounts of the company and the rule generally states that they are given the set of accounts that are presented for income tax. Along with that there are statements by different management staff within the company who try to convince them through the interpretation of the accounts that the future of the company is excellent. If the company is a public limited company, then it has to go to the stock exchange as per laws of the stock exchange. Apart from that are the banks and other authorities who have given loans to the organization and they use the set of accounts to convince themselves that their investment is safe. (Bookkeeping and Accounting)
There are also company law authorities in every country and depending up on the country, the accounts have to reach them as per laws for getting permission from them to continue business. There are no laws to send it to the 'experts' who write their comments on performance of companies in different magazines, or e-magazines, but they are generally able to collect it anyhow. It may be better to send them official copies so that misinterpretation will be less. Of course there are generally other requirements for stopping misinterpretations. There may be laws for having annual accounts published in newspapers also. In that case, it will have to them for that purpose. All these persons get the accounts and the manner of usage depends on each individual. Some shareholders are generally happy if they get a good dividend and just ignore the accounts. Some are not even able to interpret it. The income tax authorities require it to calculate whether due taxes have been paid, and since the annual accounts have to be certified by chartered accountants, this is generally done. If taxes are not paid, then the concerned managers are liable to severe penalties. The experts use it as is their personal and organizational want. Some are critical of all performances, some criticize those organizations from whom they do not get enough advertising, some feel that they can get all indications from accounts and that is not true, etc.
The meaning of cash flow prospects is whether the company has a positive cash flow or a negative cash flow. A positive cash flow means that the organization is collecting more money than what it is using. (Accounting Terminology Guide) This should be the normal situation or condition as some of the items or products in prices are inclusive of factors like depreciation which do not have to be paid in cash if the plant or machinery has been purchased for cash earlier. At the same time, positive cash flow can also be achieved by delaying payments to suppliers and other means. In general when a company has a positive cash flow, it means that the company is not in cash troubles, or should be able to function well in future. This is important to both investors and creditors who are going to invest their own funds in the organization.
The meaning of the term 'operating profitably' means that there are profits for the business entity in the course of its operations. Here the course of business operations means that the revenue from sales that it has earned. The term sales here means earnings from whatever are the products of the business entity -- products, services, time for advertising in operations of media organizations, contracts that have been executed by a contracting organization, etc. From this the deductions would be the costs of operation and that means cost of materials it has purchased, staff salaries it has paid or are due for the period under consideration, interest costs for all loans it has taken for the purpose of operations for the period or on basis of actual depending on the contract, rents and similar charges of all types that it has paid or are to be paid, commissions that have been paid or are due, costs for machine servicing and operations, etc. It is difficult to make any general statement on this as the situation varies from organization to organization and the type of service or goods that it produces.
It could be better to view and analyze at it from the other way round -- it does not contain any elements of depreciation, it does not include any dividends that are paid or which are to be paid, costs for the purpose of construction or development of facilities for future use that are being built for the growth and progress of the organization, costs for investment made in other…