What is Accounting?
Quantitative: numbers
Financial: money
Useful: practical field of study
Decisions: use the past to change the future
Four Kinds of Accounting
1) Bookkeeping: routine gathering of the information, making sure that everything is recorded.
2) Financial accounting: summary reporting for outside of your organization, mainly for loaners or investors.
3) Managerial accounting: detailed, secret data, used inside of organization, for decision making.
4) Income taxes: to make sure you are in compliance with the law.
Bookkeeping
Bookkeeping is about collecting information and getting things recorded. The recorded events help us making decisions. Per example, a grocery store have millions of customer visits per year. Without an organized bookkeeping system in place, such a store could not function as business. Managers are tracking what do customers buy, how much do they pay, which inventory is running out and what must be ordered. Bookkeeping also applies to manage your personal budget. Per example, you might need to know how much did you spend on food during last year, to help you make a decision to change your behaviour. To summarize, bookkeeping is a preservation of a systematic, quantitative record of an activity, using past records, to make better decisions in future.
Financial accounting
Financial accounting is about reporting the results of a business to outsiders. Per example, when you want to apply for a loan, a loaner will want to verify your income, assets and obligations – a summary of your financial statement. Same applies to attract investors, because, they want to know your current financial situation and your probability to make money in the future.
There are tow main fundamental reports in financial accounting:
1) Balance sheet: List of resources and obligations, which resumes what you have and what you owe.
2) Income statement: How much money does the business make.
Managerial accounting
A detailed, secret accounting data that is used internally, to make daily decisions. Managerial accounting could be a competitive tool, allowing a business to beat its competition on the marketplace.
As example, let’s take two restaurants that serve the same kind of meals, of same quality.
The first restaurant is very traditional. They just want to make sure that their bills and their employees are get paid on time.
The second restaurant is tracking detailed data. They know exactly item-by-item costs, which allows them to provide some rebate coupons to their customers. They know the sales by time of day, which helps to target promotions to the customers. They know their customer demographics, by gathering customers data, they can send them promotions by email. They can target individual customers, based on individual preferences. They also know frequently ordered combinations, which allows them to package some orders together, providing additional rebates, and making more sales.
It is clear that the second restaurant will win this competition race.
How is managerial accounting data used?
– Product costs
– Break-even analysis
– Budgeting
– Performance evaluation
– Investing in long-term projects
– Outsourcing production
– Adding a product line
Income Taxes
Accounting to satisfy our legal obligations.
Any large company keeps 3 sets of books.
– Financial reports (outsiders)
– Managerial reports (insiders)
– Tax reporting (governments)
Income taxes reporting includes the following:
– Economic income: based on values changes, worth, subjective.
– Accounting income: accrual, how much money did you make this year.
– Taxable income: reduce arguments, ability to pay, social tinkering (ex: tax deduction for charity donation, or first home buy), when you collect the cash, that’s when you report the income.
– Cash flow: cash collecting and spending, objective.
Next, learn about Financial Accounting.
