Accounting

This is my third blog spot. I think it should be the fourth or the fifth, because I thought I was going to write one every weekend but time flies and I do not have time for anything. I want to do lot of things everyday and at the end of the day I am always asking myself: What did I do today? My friend Cristina, who is much more optimistic than I am, is always encouraging me saying that if we teach and we attend students, it’s nothing more we can do.

In order to kill two birds with one stone, I am going to use the five minutes speech I gave in our English class last Monday. It was about Accounting, the subject I teach at University and I pointed out the basis of this topic to my colleagues. This was what I explained.

Accounting is an information science used to collect, classifies, and manipulates financial data for organizations and individuals. In other words, is a way to organize the economical information of a company to be useful for users. That is to say, what accounting is giving to the users is a reliable picture of the company.

Accounting information is intended to be useful in making economic decisions, in making choices among alternative courses of action. The information, therefore, helps stakeholders in his decisions. But, what kind of users?

There are two broad categories of accounting information stakeholders:

On the one hand, external users are parties outside the company who are interested in the accounting information. For example:

·         Investors, who use accounting information to decide where to invest, they can decide whether to buy, sell or keep shares;

·         Creditors, who use accounting information to make lending decisions;

·         Taxing authorities, who need accounting information to determine how much taxes the company have to pay;

·         Customers, who may need accounting information to decide which products to buy from which companies.

On the other hand, internal users are parties inside the company who are interested in accounting information. This is the case of the management level of the company who use accounting information to run the business.

Furthermore, two main categories of accounting can be discerned related to the types of users described above. Financial Accounting is designed to satisfy the needs of external users, while Managerial Accounting provides information that is useful in running a company by internal users.

It is financial accounting that I am going to focus on. Due to the fact that the information given by financial accounting is used by a variety of people in a different ways, financial accounting is required to follow generally accepted accounting principles in the preparation of the information. The documents where the information is presented to the users are called financial statements; those are balance sheet, profit and loss account and cash flow statement, among others.

A balance sheet shows, in the left side, firstly ‘non-current assets’, that is to say, fixed assets or long-term possessions, and secondly, ‘current assets’ or short-term possessions

Additionally, in the right side presents firstly ‘equity’ that represents the owner's investment in the business and what is generated for the companies, that is to say the profit or losses for the period. Secondly, ‘non-current liabilities’ or what the company must repay in the long term, and finally ‘current liabilities’, simply put what the company must repay in the short term.

If we want to know the detail of the benefits or losses of the company contained in the balance sheet inside equity, we have to look at the ‘profits and loss account’ that summarizes the revenues and expenses incurred during a specific period of time. Revenue is usually recognized when goods or services are delivered to the customer being different from the money the company received. However, expenses are the consumption of goods or services, different from the money the company pay for those goods or service. In addition, ‘net profit or loss’ represents the total profit or losses obtain by the company after taxes.

Moreover, if we want to know the detail of the cash the company has (also contained in the balance sheet, this time inside ‘current assets’, we have to look at the ‘cash flow statements’ that shows the total receipts and payments the company has done.

I hope you have enjoyed the matter and have pictured in your mind what accounting is.