Known as the language of business, accounting is a process of recording, measuring, and reporting financial information for a business or organization. Accounting is essential in all business categories, including service, merchandising, and manufacturing, that use accounting systems to identify, measure, and communicate information about the financial soundness of companies. Thus, accounting information must be useful and reliable for a business's external and internal users, who rely on it for effective decision-making. Financial professionals reporting to external users in businesses must follow the Generally Accepted Accounting Principles (GAAP), apply the foundational accounting equation, and prepare financial statements with details of a business's financial position. Of four types of statements, the income statement must be prepared as a multiple-step statement by most businesses, or can be prepared as a single-step statement by very small businesses. Notes to financial statements are included to clarify amounts.
At A Glance
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Three categories of businesses are service, merchandising, and manufacturing.
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Four types of business entities are proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each business entity has associated pros and cons that vary based on how the entity is established.
- Preparing financial information in financial accounting involves external reporting and is governed by the Generally Accepted Accounting Principles (GAAP). However, managerial accounting involves internal reporting and is not governed by GAAP.
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Ethical standards for financial professionals are necessary to ensure the information provided is trustworthy and useful for decision-making.
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Generally Accepted Accounting Principles (GAAP) are the bedrock of financial accounting for businesses. GAAP governs the process of financial statement preparation.
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The accounting equation consists of the assets of a business equaling its liabilities and equity, and should always balance on either side of the equation.
- Management and external users both depend on financial statements to provide an in-depth view of a business's financial position. Financial statements are also used to plan, evaluate, and control business operations.
- Prepared in sequence, four financial statements are related as each draws upon financial information from the other.
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Preparing the single-step income statement involves a simple process using one subtraction to calculate net income. It can be used by very small businesses.
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Preparing the multiple-step income statement involves numerous steps to arrive at comprehensive income. One of the first notable steps is calculating gross profit.
- Preparing the multiple-step income statement involves numerous steps after the gross profit calculation, including calculating operating income, net income, and comprehensive income, which provides details about a company's financial performance.
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Transactions that are unusual or do not occur often, such as discontinued operations and storm damage, are reported separately on the income statement.
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Notes to the financial statements include a further disclosure of information that may not be reflected in the financial statements.
- The notes section of a financial statement may include various items, such as the basis of accounting used, notes receivable terms, and other accounting choices.
