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.
