Accounting What Is Accounting Is a Term

Accounting

What is Accounting

Accounting is a term which is usually referred to when there is a formalized manner to hold an individual, firm or other organization to account. The process of accounting will usually involves the collection of data that measures or quantifies actions or transactions, to allow for an evaluation or assessment of performance. The most common type of accounting will be used to measure and quantify financial data. A comprehensive definition of accounting is provided by the American Accounting Association, where accounting is defined as "the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of that information" (p.1).

The definition by the American Accounting Association provides for three main activities to be undertaken when accounting takes place; the identification of the relevant information, the measurement of the data and then the communication to those may wish to use the information (Porter and Norton, 2010). It is argued that each of these tasks requires skill and judgment to be completed, which is why accounting practices will usually be undertaken by skills, qualified individuals referred to as accountants.

The first stage is the identification of information that may be needed. To assess what information is needed it is necessary to determine what the accounts will be used for. The use of the accounts may depend on the user. There are two main types of user groups; internal users and external users. To accommodate the needs of the different users, or stakeholders, there are different types of accounts which may be prepared.

The first type of accounts is the accounts which are prepared for the internal users. The internal stakeholders are usually the management of the firm, who may be at different levels, such as unit or division head, or senior board members. Managers will want to have up to data about the firm, for example, the level of production, the current and ongoing costs of different production lines, breakdown of labor costs etc. This is all financial data which is needed to run a firm and ensure that there is effective use of the resources so that the firm can create the desired profit. Managers will need current information, which will help with the decisions made on how the firm is run, giving help with both the planning and the control functions of management (Porter and Norton, 2010). Management accounting is designed to give the managers the information they need. The accountant preparing a management account will prepare the accounts based on what management state they needs, for example it may be on a daily, weekly, or monthly basis, and may be for the entire firm, but may also be broken down, such as by department, production line or product/service being sold (Seal et al., 2011). Managers of one department will usually only need to see the accounts for their own department. There are few limits of management accounting; the two main limits are the ability to obtain information, and the cost of obtaining information (Porter and Norton, 2010). Management accounts are likely to hold sensitive data, and will usually remain internal to the firm (Seal et al., 2011). The main benefit of this type of accounting is the ability to provide data to the decision makers in an effective manner and support good decision making. For example, management accounts may show which departments are most profitable, or which have the highest costs, cost accounting may be used to assess the viability of new products (Seal et al., 2011).

The second group of stakeholders is those who are external to the company. The external stakeholders may include, but is not limited to the stockholders, financial analysts, creditors and government agencies, such as tax collection departments (Elliott and Elliott, 2012). The external stakeholders have varying reasons for interest in the financial performance and condition of the firm, but are not directly involved in running the firm so do not need the same detail as management. Stockholders and analysts may which to assess the firm to determine whether or not they think the firm is a viable investment, creditors may which to assess the financial position of a firm to assess risks associated with lending money (Elliott and Elliott, 2012). Tax agencies will want an accounting of finances in order to collect the tax which is due on the firms' sales and/or profits (Collins and McKeith, 2009). The accounts drawn up for these stakeholders focus on the firms' performance for a set period of time, and are usually presented for the entire organization. These are referred to as financial accounts (Porter and Norton, 2010; Collins and McKeith, 2009). The benefit of these accounts is the way they give a good overall picture of the firms' position.