Join Jim Stice for an in-depth discussion in this video What is accounting?, part of Finance for Non-Financial Managers.
- Now let's turn our attention to accounting. What is accounting? First, accounting is quantitative, you knew that, it's numbers. Second, accounting is financial in nature, that means money, numbers about money. Third, accounting is meant to be useful, it's a very practical field of study. Well, useful for what? That's the fourth aspect of accounting, useful in making decisions. Accounting helps you use the past right now in the present to change the future.
Accounting is quantitative, numbers about money to help people, you and me, make better decisions. That's accounting. Now there are four different types of accounting. First, the most fundamental type of accounting is bookkeeping, just the routine gathering of the information, making sure that everything gets recorded because if it doesn't get recorded we'll never know about it. So bookkeeping is the systematic gathering of financial information. The second flavor of accounting is called financial accounting.
This is reporting to people outside your organization, just summary reports, not the details. Financial accounting is for people who want periodic reports as to a firm's performance, So you prepare and provide them with a report of the economic resources you have and the economic obligations you've incurred. You report as to whether you made money last year, did you lose money last year, just summary reports to people outside of your company who might be thinking of loaning you money, or might be thinking of investing in your company.
That's called financial accounting, reporting to outsiders. Now the third field of accounting is managerial accounting. This type of accounting involves the details within a company. Those are the detailed proprietary data that individuals use inside their organizations to make decisions, detailed decisions, decisions such as should I raise my prices, should I stop selling shirts and start selling shoes, should I build my factory in Wyoming or should I build it in Alabama, those detailed decisions that business people and people running organizations make every day, and this is information that is known only to those inside a company.
They don't reveal this to outsiders, it's confidential information. That's called managerial accounting. And finally, the fourth kind of accounting is income taxes. This is the accounting that makes sure that you're in compliance with the tax laws. Well, those are the four types of accounting, bookkeeping, financial accounting, managerial accounting and income taxes. Both accounting and finance deal with using numbers to make better, more informed decisions. The numbers certainly do not drive the decisions but they provide a significant input into the decision-making process.
Accounting involves gathering and compiling information for decision-makers both within the company and outside of the company. This information is often used by those in the field of finance to determine what resources are needed, and how best to acquire and utilize those resources. Accounting and finance do not involve magic, they involve understanding. Our objective here is to help you gain some of that understanding, not so that you can become accountants, but rather so that you can understand and appreciate where those numbers come from and what those numbers are used for.
Who knows, perhaps you'll find that numbers can become your friends!
- Interpret financial reports and make decisions based on available data
- Manage inventory and receivables
- Create an accurate budget
- Cost a product or service
- Analyze customers
- Understand your income taxes
- Communicate your contribution to the bottom line