Accounting 101: An Introduction to the Field

Accounting is one of the most important internal aspects to any business that is to be financially successful in today’s market. It is the process of documenting all relevant economic information about a firm and communicating that information to key players. Managers and Executives need accounting information to make decisions and run their business to achieve maximum profitability. Shareholders need accounting information to make informed investments.

There are many types of accounting that all have different roles in the business world. Probably the best-known and most ‘classic’ type of accountant is a CPA, or Certified Public Accountant. A CPA has a very diverse client list. They can serve anyone including individuals, private firms, large publicly traded corporations, the government, or non-profit organizations. They can perform the role of an independent auditor, tax advisor, or financial consultant.

When performing an audit, a CPA will produce an independent auditor’s report that will tell the client four key pieces of information. First it identifies the documents that were audited and describes that the purpose of this report is to express an opinion about the documents in questions. Next it explains the standards used to analyze the data. Third is the actual opinion of the auditor in regards to the financial documents reviewed. Finally, the auditor elaborates on his opinion regarding the effectiveness of the financial reporting of the firm.

Another type of accountant is a CMA, or Certified Management Accountant. A CMA serves a smaller customer base, because they typically work for a single firm. The major role is to advise the company on their financial management, accounting processes, and budgetary issues. A CMA may work with individual employees of that company, but their main function is to advise the executives on the company’s complete financial structure. They are often involved in major decisions for the company.

A subset of managerial accounting is cost accounting. A cost accountant works closely with the budget structure of a company. They are typically involved with determining the internal costs of many functions and the profitability of the routine company operations.  Cost accountants have a very future-oriented job in that they are primarily concerned with using historical data to forecast what the prospective financial strength of the company will be.

A third major type of accounting is a financial accounting. Financial accountants are primarily responsible for the preparations of the financial documents for review by the corporate decision makers. Managerial accountants, cost accountants, top management, and shareholders use these documents to make major business decisions. Financial accountants assemble an annual report including balance sheets, income statement, statement of cash flows, and statement of change in owners’ equity (or retained earnings). These documents are usually targeted to an external audience.

Financial statements are vital to the success of any profitable business. Their purpose is to formally record all financial activities of the company or individual.  These statements summarize in a standard format the financial status of the company in both the short term and the long term. There are four main types of financial statements.

First, the balance sheet summarizes the company’s total assets, liabilities and owners’ equity at a given point in time. This report is also known as the statement of financial position. The balance sheet is used at the beginning of year as a starting point. At the end of the year a new balance sheet will conclude the fiscal cycle. The other financial statements that will be discussed are used to fill in the gap, because a lot can happen in a year.

The income statement summarizes the revenue and expenses for the year and highlights if the company operated at a profit or at a loss. It is in this report that the total gross income is defined as well as all of the expenses that were incurred along the way. The top line of the statement is net sales and the bottom line is net income.

The statement of change in owners’ equity, or statement of change in retained earnings also analyzes data over a time period. Typically this is over a fiscal year. The two major components of owners’ equity are paid-in capital, or cash investments, and retained earnings, or the net income less dividends. If retained earnings are negative because dividends have exceeded net income, this is considered a deficit.

The final major financial statement commonly used by shareholders is the statement of cash flows. The purpose of this report is to follow the company’s cash activities during the year. This is mainly concerned with cash transactions pertaining to operating, investing, and other financial activities.

Shareholders use the four major financial statements to make investment decisions and to see what the company is doing with their money. Executives and top management use statements to make internal budgetary decisions and forecast out for the future success of the business. There are many components that go into the financial reporting for a company, and all information is vital to its continued financial health.