The Basics on Accounting for Businesses
People who make decisions in accounting, make it based on three categories: the people who manage a business, the external people of a business that have a direct financial interest to a business, and the people and organizations that have an indirect effect on a business. This applies to non-profit organizations as well.
Management refers to the group of people who are in charge for operating a business and for measuring up to the profitability and liquidity goals. If a business is extremely large, then the management will most often require more than one person, and the people are hired to perform their job. Managers need to answer important questions such as what was the company’s net income, and if they have a substantial rate of return. Does the company have enough assets, and which products bring in the most money? When deciding, managers usually follow a systematic approach. Even though larger businesses require a more concrete analysis, they follow a similar pattern to small businesses.
Financing a Business
Financing for a company is critical because they need that money to continue their operations.
Investing in a Business
Companies invest in their current assets so that it will make money for them in the future.
Producing Goods or Services
Operations and production management is responsible for developing and producing goods and services that the company can sell.
Learning marketing and advertising skills so that they can distribute goods and services more efficiently.
Human resource management requires the hiring of qualified employees, and also paying them.
The information management retrieves data about the company such as how much they made in the last month and organize the information in a way so that it can be used. It also releases information to managers, and to important people outside the business.
A Direct Interest in Business
Another group of individuals that needs knowledge in accounting is those you have a direct interest in the business. They use the information to analyze how a business is performing, and generally publish their financial report which shows how well they meet their profitability and liquidity goals. These statements display how well a company did in the past; most importantly, how well they will do in the future.
The Investors and Creditors
However, many people outside the business also study the financial reports. They are the investors and the creditors. The investors are the individuals that invest in a business and will keep a part of the ownership. They are concerned with their past success and failures, and also will like to know the potential earnings. A concrete analysis of the financial statement will help prospective investors base their decisions. Once they finish investing they must continue to study a business financial statement. Next, the creditors are the companies that lease money to businesses for short- or long-term needs. Creditors are the people that deliver money or provide services for companies in advanced before getting paid. Their main concern is whether a business will have the money to repay the money with interest in an approximate time. Some of the things they study before they make their decisions are a company’s liquidity, cash flow, and profitability. Some examples of creditors are banks, mortgage companies, and insurance companies.
How Accounting Information is Being Used
Over the years, the shift of people who used accounting information has varied drastically. Now, it is heavily used by governmental agencies, and in matter of fact taxes is the main source of income for government. According to the rules and regulations of federal, state, or even local laws, individuals and companies are required to pay a variety of taxes. These include but are not limited to, sales tax, excise tax, social security tax, federal, state, payroll, and city income taxes. Each tax requires their own rules and regulations which can be very confusing at times. Reporting your taxes is a law and a very meticulous and tedious process. For example, The Internal Revenue Code contains over a thousand rules for delivering accounting information in federal income taxes.
Also, most companies generally have to report to one or more regulating agencies in the United States. All corporations must answer to the Securities and Exchange Commission or SEC. This is set up by the government to insure and protect the public by regulating the buying and selling of stocks. Companies that are listed on the Stock exchange must adhere to the rules and regulations. Some other groups such as labor unions analyze the financial statements of corporations to help negotiate a contact. The income of a company plays a major role in forming these contracts.
The individuals who give advice to investors and creditors such as brokers and financial analysts have an indirect financial interest in a business. The amount of interest in the financial health of corporations has been growing by consumer groups such as customers and the public. They are also concerned about how the corporation will affect the social patterns of the environment and of the people that reside in that area. The President’s Council of Economic Advisers and the Federal Reserve Board use accounting information to set economic policies and programs.
It’s fascinating to note that about thirty percent of the businesses in the United States consist of non-profit organizations. Some examples of non-profit organizations (NPO) include hospitals, and universities. Some well-known non-profit organizations include Red Cross, YMCA, Better Business Bureau, and World Wildlife Fund. These organizations still have a budget and needs to raise money just like any other business. They raise money by collecting it from creditors, donors, and even investors. They also need to have a detailed plan and to pay creditors back in an efficient manner, and they also have to follow the tax rules. Even though businesses and non-profit organizations have different agendas, they both generally follow the same basic rules.