Financial Accounting and types of ownership
According to Dictionary.com, financial accounting is defined as the theory and system of setting up, maintaining, and auditing the books of a firm. Companies and firms rely heavily on accounting data to analyze the continuing growth of the business as well as to make financial decisions for the betterment of the company. Accounting systems of the company depend upon the company size and the requirements of the shareholders. Some companies employ user friendly software such as QuickBooks and others use more complex accounting software such as Peachtree or NetSuite to record their financial data.
Financial Accounting –
Financial statements reflect the image and reputation of the firm. This shows if the company is growing or losing money over time. They help bankers make decisions about lending money, by calculating risk based on the financial analysis and ratios of the current assets and liabilities of the borrowing company. Statements give ease to the shareholders to verify if their investments are safe and help in making decisions about any future involvement with the company. Creditors and suppliers can also refer to financial statements before they decide whether to grant loans or not.
Management Accounting –
Based on the size of the company, there might be different departments overseeing the performance of the company. Management is well known as a key player of the organization, who runs the company based on the company’s mission, vision, and beliefs. Management accounting helps internal decision makers, such as top executives, department heads, and other people at the management level within the company. It serves as a mode of evaluating employee performance or the need to take necessary steps required for the betterment of the company.
Some of the common questions asked by bankers, lenders, suppliers, and shareholders before they make any decision are:
- What is the financial situation of the company on any given day?
- How well did the company do during a given time period?
- Will the company be able to make loan payment/pay bills on time?
- Will I get a return on my investment?
Three statements that are very important for decision makers that are prepared by the accountant are:
- Balance Sheet
- Income Statement
- Statement of Cash Flows.
An individual can form different types of corporation or ownership interest based on the need and type of business. Following are the types of corporations or ownerships one can elect:
- Sole Proprietor – A business with a single owner. In this case the person who is running the business is also liable personally for all the business liabilities.
- Partnership – A business operated by two or more individuals who act as co-owners. Liability of business is often guaranteed by all of the owners’ personal net worth.
- Corporation – An entity created under state law that has one or more owners who have very limited liability.
Corporations and limited liability companies can both have board of directors who are responsible for the continuing growth of their businesses. They can further appoint managers who supervise day to day operations in their specific departments and prepare reports as requested by the board of directors. In order to run the company in an effective and efficient way, duties should be distributed and segregated among different individuals. In almost every corporation or LLC, shareholders/members appoint a board of directors who further appoint managers. Among the managers of an entity, Chief Executive Officer is considered to be the top position in the organization.
Privately Owned – A corporation owned by an individual, a group of partners or a small family, in which shares are not publicly sold.
Publicly Owned – A corporation that sells its shares of ownership to the general public.
Accounting standards and auditing regulations have been established to monitor publicly owned as well as privately owned corporations. They are-
- GAAP – Generally Accepted Accounting Principles – This term applies to all broad concepts and detailed practices to be followed in preparing and distributing financial statements. It includes all the conventions, rules, and procedures that together comprise accepted accounting practice.
- FASB – Financial Accounting Standards Board – The private sector body that is responsible for establishing GAAP in the United States.
- SEC – Securities and Exchange Commission – The ultimate government agency charged by the US Congress to implement GAAP on all companies whose shares are traded in general public.
- IASB – International Accounting Standards Board – An international body established to develop in the public interest, a single set of high-quality, understandable, and enforceable global accounting standards
- AICPA – American Institute of Certified Public Accountants – A Professional association in the private sector that regulates the quality of the public accounting profession.
- Sarbanes-Oxley Act – A US Law passed by Congress in 2002 that gave the government a larger role in regulating the auditing profession.
Accounting has become an integral part for the survival of businesses. Every business needs an accountant to manage their financial needs and to provide accurate information of the business to its shareholders. Based on the needs and requirements of the business, an individual can choose different types of ownership that benefit the company. Different types of ownership can also protect or minimize risk of shareholder’s personal net worth against company’s liability.