Different Kinds of Accounting Information - Example

Accounting Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: Accounting Introduction Diverse definitions have emerged in literature in the extensive efforts to demarcate this field of study, its relation to other fields as well as the purpose of its applicability. This has culminated in different definitions being forwarded by diverse proponents who attempt to give precise definitions and the context of accounting amidst other fields like finance, costing, taxation and auditing among others. This has resulted in different problems emanating from the dynamics in the accounting fields due to its continuously changing environment, its boundaries as well as the discourse on whether accounting is an art or a science. Against this backdrop, this paper is a profound effort to explain the meaning of accounting and why it matters as well as considering its use in the context of corporate undertakings as well as other institutional or social contexts. Definition of accounting Accounting has basically been defined in the Oxford dictionary (2012, p. 1) as the process or the general work of keeping and maintaining accounts which are financial in nature. On a wider scope, accounting has been perceived as the art that is associated with the processes of classifying, recording as well as summarizing in a meaningful manner and in terms of money, events and transactions which wholly or partially possess financial characteristics and interpreting the results that emanate from them (Koornhof, 1998, p. 25). Ireland (2005, p. 1) determined that from a traditional perspective, the study of accounting had been divided into two wide realms of enquiry mostly founded on the end users if the accounting information. This will be explored in a subsequent section analyzing the different kinds of accounting information. Reasons for producing accounting information Diverse reasons have been given as the rationale behind the generation of accounting information. Firstly, accounting has been perceived to be central to the planning and budgeting processes in the firm. In this regard, the managers/directors use the accounting information to plan the future undertakings and goals of the firm against the current financial performance through the establishment of strategies to achieve these goals. In addition, accounting information has been pointed out as being central to attention-directing whereby the attention of the managers is drawn through comparing the actual and the planned performance of the firm (Collier, 2003, p. 5). Secondly, accounting information is integral in the decision making process, both internal and external to the firm. At the internal level, the managers use the accounting information to make decisions which are consistent with both the financial performance of the firm and the set goals and strategies. At the external level, the shareholders use the accounting information to determine the validity of their current investment and prospective investors use the accounting information to ascertain the feasibility of their intended investment. Moreover, accounting information has also been cited as being fundamental to the problem-solving process in the firm whereby the managers use it in the process of identifying the most ideal choice among a wide alley of alternative actions based on the actual performance of the firm (Collier, 2003, p. 5). Lastly, accounting information has been linked to viable control in an organization. This is whereby the managers use this information in the process of maintaining the performance of the institution as close as possible with the previously laid down plan, or in other instances, utilizes the same financial information in the efforts of plan modification to match the performance of the firm (Collier, 2003, p. 5). Different kinds of accounting information It has been pointed out that just as there are many types of economic information, there are different kinds of accounting information. However, this section will center on two kinds of accounting information; financial accounting information and management accounting information. Firstly, there is financial accounting which is chiefly concerned with the necessities of the users outside a certain firm or institution. In this regard, this type of accounting is tied to the control and management of resources from an external perspective. The primary role of this type of accounting is providing and reporting the performance as well as the niche of the firm to these external users using the financial statements. These external users include the shareholders who have invested in the firm, or banking institutions projected to give loans to the company. In addition, the financial accounting information has also been cited as being used by managers and in income tax returns. In actual sense, this kind of accounting information has been perceived to be widely utilized both in and out of an organization for diverse purposes resulting in it being commonly referred to as ‘general purpose’ accounting information. Secondly, there is management accounting which is primary concerned with the needs of the users who are internal to the firm, for instance, the employees, directors and the overall management of the firm. In this regard, management accounting is directly linked to the control and management of resources at an internal level. The statements produced for management accounting are usually more comprehensive than those provided to the external users aforementioned above and in most cases, are not obliged to meet any legal prerequisites unlike the statements in financial accounting (Ireland, 2005, p. 1). In this regard, the management accounting information is usually required by the managers and employees in the company to control as well as run the operations of the organization on daily basis, for instance, the amount of money in the bank accounts of the company, the amount owed to creditors among other financial information. Significance of accounting Accounting is also significant beyond the direct use of the accounting information by the particular identifiable user groups mentioned above. At a very micro level, accounting is integral in making decisions when one is confronted by financial impediments in daily undertakings as an individual. In this regard, the information on how much and individual has, the amount owed to other parties as well as the cost of the needs at hand is imperative in the prioritization process in the efforts to satisfy these diverse and dynamic needs. On the other hand, accounting is integral in a small business for the purposes of financial analysis. This is based on the fact that every businessman is a self-styled financial analyst and thus, substantial knowledge in accounting is fundamental in the process of determining the nature of the business ventures, the capital required and the projected profit of the business undertaking. In addition, accounting is vital in strengthening and underpinning other academic disciplines like auditing, taxation, costing, economics and business law among other fields. In this regard, the study of accounting is central in enriching the content of these disciplines. On the other hand, the extended study accounting is important in understanding and explaining the dynamics in the contemporary world, both in the socio-economic and political perspectives. This fact is best epitomized by the global financial crisis in 2007 which was greatly attributed to the failure of the mortgage system in America whereby people became severely indebted and not in the capacity to pay off their loans. Lastly, accounting is central in explaining and breaking down the governmental policies to the public in terms of the costs and relevance in meeting the public needs when juxtaposed with the projected outcomes. In this regard, accounting increases the legitimacy of government policies in the public domain. However, it is fundamental to explore the power in accounting, its source and the nature of this power. What gives accounting its power? Much of the power in accounting emanate from the need to solve the diverse problems confronting organizations in the modern world. As previously mentioned, accounting is an integral tool in the problem solving processes of a firm. In addition, based on the uncertain nature of the business operations in the contemporary world as a result of market liberalization, globalization and dynamics in consumer demands, accounting is fundamental in the strategic decision making process of the firm to project the future performance as well as the projected returns of the institution based on current investments. These give accounting considerable power in the modern corporate world. In addition, the use of accounting by the government agencies in the budgeting as well as taxation processes gives it immense power in influencing the economy of a given country. In this regard, the extent to which ideal accounting standards and policies are adhered to at the national level determines the efficiency in the budgeting process as well as effectiveness in different processes like revenue collection and taxation. In regard to the nature of this power in accounting, this power is inherent based on the fact that it is only through accounting that an organization is able to make sound investment decisions, effectively plan for the future among other functions of accounting in the organization outlined in the preceding section. Nonetheless, it is a paradox that despite the great importance of accounting at the organizational and national level, accountants who are the actual practitioners of accounting don’t yield much power in the power structure of different organizations. Conclusion From the above discourse, it is apparent that accounting information is produced for different purposes and intended for diverse users. In addition, there are different kinds of accounting information which can broadly be categorized into financial accounting information and management accounting information. Accounting has experienced increased significance in the recent times, which has resulted in its yielding massive power at the organizational as well as the national levels. References Collier, P.M., 2003, Accounting for Managers:Interpretingaccounting informationfor decision- making, John Wiley & Sons Ltd, West Sussex, England. Ireland, J., 2005, Principles of Accounting, University of London Press, London. Koornhof, C., 1998, ‘Accounting and Accounting Information’, Retrieved 04 September, 2012 < http://upetd.up.ac.za/thesis/available/etd-10232001-152437/unrestricted/02chapter2.pdf> Oxford dictionary, 2012, Retrieved 04 September, 2012 < http://oxforddictionaries.com/definition/english/accounting>.   Read More