What is accounting?
Accounting is simply a system we need to organize all our important information. It can also be defined as the system that reports on the financial health of business. Accounting is known to be the official language of business. Simply put, to run a successful business you will need to understand some basic accounting.
Think of accounting as the score board used to keep track of the game of business. Business is a game between your debt (liabilities) and ownership (equity) used in building your assets. In this game Team 1 are the creditors, credit card companies, vendors, etc. and Team 2 is you using past income to build assets.
Whether or not you win this game all depends on you. If you let team1, your creditors build your assets, they rightfully own most of your business and can control what you can and cannot do as a business.
For instance if most of your debt are on a credit card you become a slave (financial slavery) to the credit card companies as you have to work relentlessly to pay them back. On the other hand, if you use your past income to build assets, then you find more freedom and exercise more control.
The more complex your business is, the more complex your score board will be but the basic components of any score board are the same. Just remember as a business owner you will like to build assets and you build these assets either with debt or past income or cash from other sources.
Types of accounting information
The type of information derived from accounting activities can be divided into 2 main areas
Financial information: this is accounting information required by external users. External users of financial statements include bankers, creditors, investors, etc. These are people who are interested in the financial wellbeing of the business because of investments they have with the business. Financial information is provided by a branch of accounting called financial accounting
Financial accountants have to follow generally accepted accounting principles (GAAP) These rules are established by the Financial Accounting Standards Board (FASB). Most external reporters require financial reports follow the GAAP rule.
Managerial information: this is accounting information required by internal users. Internal users of managerial information include employees, managers and board of directors. Unlike financial accounting, managerial accountants are not subject to stringent rules. Managerial accountants have the flexibility to design their financial reports in a way that benefits its internal users.