Purpose of Accounting in Society

Apart from being quite useful and effective in the business sector, accounting has various uses in society as well.

For Investors Financial statements expose any fraud or wrong business practices of an organization, thus, investors can refrain from investing in organizations involved in malpractice.

For the Common People A company proves its worth and fairness in the competitive market with the help of its financial statements. A fully detailed and fair report helps in creating goodwill for the company, thus helping the company to grow better.

For Government Agencies The tax authorities can keep a check on the business practices of various organizations by analyzing and keeping a check on the financial statements. Government agencies, through the accounting statements, ensure that the funds being raised by the company are from legal sources and that the company is not cheating the shareholders, investors or the general public in any way.

The process of accounting starts with bookkeeping, that involves recording the transactions of the company. Once the financial statements are ready, accountants, investors, and financial analysts evaluate them and then use them for future financial decisions. Thus, for accounting to be beneficial, the financial reports should be timely, easy to understand, fair, and relevant.

Introduction to Accounting Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers (Elliot, Barry & Elliot, Jamie: Financial accounting and reporting). Accounting has been defined as:

the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.(AICPA) Accountancy therefore encompasses the recording, classification, and summarizing of transactions and events in a manner that helps its users to assess the financial performance and position of the entity. The process starts by first identifying transactions and events that affect the financial position and performance of the company. Once transactions and events are identified, they are recorded, classified and summarized in a manner that helps the user of accounting information in determining the nature and effect of such transactions and events. Users of Accounting Information - Internal & External Users of Financial Statements

Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently."

There are different kinds of users of financial statements. The users of financial statements may be inside or outside the business.

The users of financial statements use financial statements for a large variety of business purposes and their ability to understand and analyze financial statements helps them to succeed in the business world. Classification of Users of Financial Statements: The financial statements are used by different categories of people for different purposes. The various users of financial statements are classified and detailed as follows: Internal Users: The internal users of financial statements are individuals who have direct bearing with the organization. They may include: Managers and Owners: For the smooth operation of the organization, the managers and owners need the financial reports essential to make business decisions. So as to provide a more comprehensive view of the financial position of an organization, financial analysis is performed with the information supplied

in the financial statements. The financial statement is used to formulate contractual terms between the company and other organizations.

A variable of the financial statement like the current debt to equity ratio is important in deciding the amount of long term capital that would be required to be raised. The financial statements of other companies can also provide investment solutions to different companies. Sometimes it becomes difficult to decide the right field in which financial resources may be channelized. In such situations the financial statements of other companies provide the appropriate guideline. Employees: The financial reports or the financial statements are of immense use to the employees of the company for making collective bargaining agreements. Such statements are used for discussing matters of promotion, rankings and salary hike. External Users: The external users comprise of: Institutional Investors: The external users of financial statements are basically the investors who use the financial statements to assess the financial strength of a company. This would help them to make logical investment decisions. Financial Institutions: The users of financial statements are also the different financial institutions like banks and other lending institutions who decide whether to help the company with working capital or to issue debt security to it. Government :The financial statements of different companies are also used by the government to analyze whether the tax paid by them is accurate and is in line with their financial strength. Vendors: The vendors who extend credit to a business require financial statements to assess the creditworthiness of the business. General Mass and Media: The common people as well as media also make part of the users of financial statements.

Brief List of Users of Financial Statements: Existing equity investors and lenders, to monitor their investments and to evaluate the performance of management. Prospective equity investors and lenders, to decide whether or not to invest. Investment analysts, money managers, and stockbrokers, to make buy/sell/hold recommendations to their clients.

Rating agencies (such as Moody's, Standard & Poor's, and Dun & Bradstreet), to assign credit ratings. Major customers and suppliers, to evaluate the financial strength and staying power of the company as a dependable resource for their business. Labor unions, to gauge how much of a pay increase a company is able to afford in upcoming labor negotiations. Boards of directors, to review the performance of management. Management, to assess its own performance. Corporate raiders, to seek hidden value in companies with under priced stock. Competitors, to benchmark their own financial results. Potential competitors, to assess how profitable it may be to enter an industry. Government agencies responsible for taxing, regulating, or investigating the company. Politicians, lobbyists, issue groups, consumer advocates, environmentalists, think tanks, foundations, media reporters, and others who are supporting or opposing any particular public issue the company's actions affect. Actual or potential joint venture partners, franchisors or franchisees, and other business interests who need to know about the company and its financial situation.

Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization.

Internal users (Primary Users) of accounting information include the following: Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. Employees: for assessing company's profitability and its consequence on their future remuneration and job security. Owners: for analyzing the viability and profitability of their investment and determining any future course of action. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements.

External users (Secondary Users) of accounting information include the following: Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company. Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.

External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions. Accounting is a very dynamic profession which is constantly adapting itself to varying needs of its users. Over the past few decades, accountancy has branched out into different types of accounting to cater for the different needs of the users.
Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be [1] measured in either nominal monetary units or units of constant purchasing power. The fundamental need for financial accounting is to reduce principalagent problem by measuring and monitoring agents' performance and reporting the results to interested users. Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day-to-day running of the company. Management accounting provides accounting information to help managers make decisions to manage the business. In short, financial accounting is the process of summarizing financial data taken from an organization's accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization. Financial accountancy is governed by both local and international accounting standards.

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. In contrast to financial accountancy information, management accounting information is: primarily forward-looking, instead of historical; model based with a degree of abstraction to support decision making generically, instead of case based; designed and intended for use by managers within the organization, instead of being intended for use by shareholders, creditors, and public regulators; usually confidential and used by management, instead of publicly reported; computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards. Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the [1] future. Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. Cost accounting information is commonly used in financial accounting information, but first we are concentrating on its use by managers to make decisions. Unlike the accounting systems that help in the preparation of financial reports periodically, the cost accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting Principles. As a result, there is wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization.

Governmental accounting is an umbrella term which refers to the various accounting systems used by various public sector entities. In the United States, for instance, there are two levels of government which follow different accounting standards set forth by independent, private sector boards. At the federal level, the Federal Accounting Standards Advisory Board (FASAB) sets forth the accounting standards to follow. Similarly, there is the Governmental Accounting Standards Board (GASB) for state and local level government.

Definition of 'Tax Accounting'

Accounting methods that focus on taxes rather than the appearance of public financial statements. Tax accounting is governed by the Internal Revenue Code which dictates the specific rules that companies and individuals must follow when preparing their tax returns. Tax principles often differ from Generally Accepted Accounting Principles.

OTHER ACCOUNTING BRANCHES

Auditing Auditing is the examination and verification of company accounts and the firm's system of internal control. There is both external and internal auditing. External auditors are independent firms that inspect the accounts of an entity and render an opinion on whether its statements conform to GAAP and present fairly the financial position of the company and the results of operations. In the U.S., four huge firms known as the Big Four PricewaterhouseCoopers, Deloitte Touche Tomatsu, Ernst & Young, and KPMG - dominate the auditing of large corporations and institutions. The group was traditionally known as the Big Eight, contracted to a Big Five through mergers and was reduced to its present number in 2002 with the meltdown of Arthur Andersen in the wake of the Enron scandals. (For further information see, An Inside Look At Internal Auditors.) The external auditor's primary obligation is to users of financial statements outside the organization. The internal auditor's primary responsibility is to company management. According to the Institute of Internal Auditors (IIA), the internal auditor evaluates the risks the organization faces with respect to governance, operations and information systems. Its mandate is to ensure (a) effective and efficient operations; (b) the reliability and integrity of financial and operational information; (c) safeguarding of assets; and (d) compliance with laws, regulations and contracts. Fund Accounting Fund accountingis used for nonprofit entities, including governments and not-for-profit corporations. Rather than seek to make a profit, governments and nonprofits deploy resources to achieve objectives. It is standard practice to distinguish between a general fund and special purpose funds. The general fund is used for day-to-day operations, like paying employees or buying supplies. Special funds are established for specific activities, like building a new wing of a hospital. Segregating resources this way helps the nonprofit maintain control of its resources and measure its success in achieving its various missions. The accounting rules for federal agencies are determined by the Federal Accounting Standards Advisory Board, while at the state and local level the Governmental Accounting Standards Board (GASB) has authority. Forensic Accounting Finally, forensic accounting is the use of accounting in legal matters, including litigation support, investigation and dispute resolution. There are many kinds of forensic accounting engagements:bankruptcy, matrimonial divorce, falsifications and manipulations of accounts or inventories, and so forth. Forensic accountants give investigate and analyze financial evidence, give expert testimony in court and quantify damages.

Difference of Auditing and Accounting

Difference between accounting and auditing

Accounting is process of identifying, measuring, and communicating economic information to various users. The main goal of accounting is to provide a company with clear, comprehensive, and reliable information about its economic activities and status of its assets and liabilities. This information is presented in the form of accounting reports like the balance sheet, income statement, statement of changes in equity (also called shareholders' equity statement), and statement of cash flows (also called cash flow statement). By means of accounting reports it is possible to perform the following (list non-inclusive): Understand and re-allocate internal resources of the company to ensure its financial stability Review profitability of the company's economic activities Understand the company's cash inflows and outflows Verify conformity of a company's economic activities to government regulations Internal users of accounting reports are managers, owners, and employees. External users of accounting reports are investors, creditors, and government. Audit is independent appraisal performed by an independent expert of an activity or event. There are operational, technical, ecological and other types of audit. Most commonly, nevertheless, this term refers to audits of financial statements.

Audit of financial statements is the process of examining the financial statements and the underlying records of the company in order to render an opinion as to whether the statements are fairly presented. Most commonly financial audits are performed on a company's request for the benefit of financial information users (i.e. internal and external). Auditors analyze and compare accounting reports and confirmation documents as well as verify conformity of a company's accounting with established standards and regulations (e.g. US GAAP, IFRS). Therefore, the main goal of an audit is to perform thorough evaluation of a company's financial records and reports and provide a company with improvement recommendations based on that evaluation. As we can see, accounting provides financial information to users of such information, and auditing is a means to ensure such information is reliable and comforts with established rules and regulations.

Differences Between Auditing And Accounting

Accounting is related to the collection, recording, analysis and interpretation of financial transactions but auditing refers to the examination of books of accounts along with the evidential documents. So, following differences can be shown between auditing and accounting:

1. Meaning Accounting is the act of collecting, recording, analyzing and interpretation of financial transactions but auditing is the act of examination of books of accounts and evidential documents, so as to prove the true and fair view of profitability and financial position.

2. Beginning Of Work Work of accounting begins when financial transactions take place but work of auditing begins when work of accounting ends.

3. Scope Accounting prepares profit and loss account and balance sheet and other statements as per the instruction of auditor but auditor checks the books of accounts considering their fairness as well as complying with the provision of company act or not.

4. Nature Of Work Accounting keeps the record of financial transactions but auditor checks and verifies the books of accounts.

5. Staff An accountant is a staff of an organization and draws the salary from the business but an auditor is an independent person who is appointed for specific period and gets a sum of remuneration.

6. Preparation Of Report

An accountant does not prepare report after the completion of his task but he has to give information to the management when needed but auditor needs to prepare and present report after the completion of his work to the concerned authority.

7. Responsibility An accountant remains responsible to the management but an auditor is responsible to the owners or shareholders.

FUNCTIONS of: 1. IASB-Started its operations in 2001 with the following objectives:
Develop, in the public interest, a single set of high quality understandable and enforceable global accounting standards that require high quality transparent and capable information in financial statements and other financial reporting to help the participants in the various capital markets of the world and other users of the information to make economic decisions. Promote the use and rigorous application of those standards. Work actively with national standards-setters to bring convergence of national accounting standards and International Financial Reporting Standards (IFRS) to high quality solution. IFRSs are designed to apply to the general purpose financial statements and other financial reporting of all profit-oriented entities. These entities include those engaged in commercial, industrial, financial and similar activities, whether organized in corporate or other forms. IASB replaced the old regime of International Accounting Standards Committee (IASC) in standard setting. The IASC was issuing International Accounting Standards (IAS). So far there were forty one IAS which had been issue before IASB replaced IASC in 2001. As one of the major weaknesses of IASC was that the standards it was issuing contained many objectives thereby defeating the purpose of consistency in recognition, measurement and presentation of transactions. IASB intends to limit such choice of accounting treatments. http://cbdd.wsu.edu/kewlcontent/cdoutput

IASB. Formed in January 2001, the ISAB replaced its predecessor, the International Accounting Standards Committee (IASC), as the international standards setting body. Looking towards greater formalization of international accounting standards, IASB is structured similarly to the FASB. It is currently the focus of the IASB, in collaboration with the FASB and other accounting focused organizations, to "converge" standards and develop a single, universally accepted set of biding international accounting standards. The IASC, and now IASB, issue a series of standards known as International Financial Reporting Standards (IFRS), formerly called International Accounting Standards (IAS).

2. FRSC- Financial Reporting Standards Council

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Posted by Geemiz | Posted in Accounting Guidelines | Posted on 11-11-2010 Tags: Accounting News, Accounting Updates

The standards being used in practicing the accountancy profession in the Philippines is not created by ordinary individuals. They are not just mere suggestions by any businessman or any politician, but they are created by a set of body made by the Professional Regulation Commission (PRC). The Accounting Standards Council (ASC) is responsible in establishing and improving accounting standards that will be generally accepted here in the Philippines but now the Accounting Standards Council is being replaced by the Financial Reporting Standards Council. As mentioned above the Professional Regulation Commission has created a body that functions to support the Board of Accountancy the agency authorized by law to promulgate rules and regulations that affects the practice of the accountancy profession in carrying its powers and functions and this is in accordance with R.A. Act No. 9298 the Philippine Accountancy act of 2004 the law that r egulates the practice of accountancy in the Philippines.

Composition of the Financial Reporting Standards Council There are 15 members that composed the Financial Reporting Standards Council The chairman must have an experience or is currently a senior accounting practitioner. The 14 members or representatives must come from the following agency or group. 1 from the Board of Accountancy 1 from the Securities and Exchange Commission 1 from Bangko Sentral ng Pilipinas 1 from the Bureau of Internal revenue 1 from the Commission on Audit 1 from the major organization of preparers and users of financial statements Individuals from the accredited national professional organization of CPAS: 2 from the Public Practice 2 from the Commerce and Industry 2 from the Academe or Education 2 from the Government All members of the Financial Reporting Standards Council (FRSC) including the chairman shall have a term of 3 years and is renewable for another term.

3. IFRSIC-About the IFRS Interpretations Committee

The IFRS Interpretations Committee is the interpretative body of the IFRS Foundation. Its mandate is to review on a timely basis widespread accounting issues that have arisen within the context of current International Financial Reporting Standards (IFRSs). The work of the Interpretations Committee is aimed at reaching

consensus on the appropriate accounting treatment ( IFRIC Interpretations) and providing authoritative guidance on those issues. In developing interpretations, the Interpretations Committee works closely with similar national committees. The interpretations cover both:

newly identified financial reporting issues not specifically dealt with in IFRSs; and issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop in the absence of authoritative guidance The Interpretations Committee comprises 14 voting members drawn from a variety of countries and professional backgrounds. They are appointed by the Trustees of the IFRS Foundation and are selected for their ability to maintain an awareness of current issues as they arise and the technical ability to resolve them. IFRIC interpretations are subject to IASB approval and have the same authority as a standard issued by the IASB.

4. The Philippine Interpretations Committee (PIC)

The FRSC formed the Philippine Interpretations Committee (PIC) in August 2006 to assist the FRSC in establishing and improving financial reporting standards in the Philippines. The role of the PIC is principally to issue implementation guidance on PFRSs. The PIC members were appointed by the FRSC and include accountants in public practice, the academe and regulatory bodies and users of financial statements. The PIC replaced the Interpretations Committee created by the ASC in 2000.

The Philippine Interpretations consist of:.

Philippine Interpretations - IFRIC. These correspond to Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) of the IASB.

Philippine Interpretations - SIC. These correspond to Interpretations of the Standing Interpretations Committee (SIC) of the IASC.

PIC Q&As. These are Interpretations developed by the Philippine Interpretations Committee (PIC).

5. Board of Accountancy- PRESIDENTIAL DECREE NO. 692

THE REVISED ACCOUNTANCY LAW

*ARTICLE II
The Board of Accountancy Section 4. The Board of Accountancy and its composition. The Board of Accountancy shall be composed of a chairman and six (6) members to be appointed by the President of the Philippines upon recommendation of the Professional Regulation Commission. The Board shall elect a vice-chairman from among its members for a term of one year. The Chairman shall preside in all meetings of the Board and in the event of a vacancy in the office of the Chairman, the vice-chairman shall assume such duties and responsibilities until the end of the term or until such time as a Chairman is appointed.

Section 5. Functions of the Board of Accountancy. The Board of Accountancy shall have the following functions: a) To determine and prescribe minimum requirements leading to the admission of candidates to the certified public accountant s examinations; b) To determine and prepare the contents of licensure examinations; score and rate the examination papers and submit the results thereof to the Commission within two hundred forty (240) days after the last examination day unless otherwise directed by the Commission; c) To look from time to time into the conditions affecting the practice of the accountancy profession and whenever necessary, adopt such measures as may be deemed proper for the enhancement and the maintenance of high professional, ethical and technical standards; d) To investigate violations of the Accountancy Law and the rules and regulations promulgated thereunder and for this purpose to issue summons, subpoena and subpoena duces tecum to violators or witnesses thereof and compel their attendance to such investigation or hearings; e) To promulgate decisions on such administrative cases subject to review by the Commission; f) After due process, to suspend, revoke, or reissue certificates of registration for causes provided for by law or by the rules and regulations promulgated therefor; g) To perform such other functions and duties as may be deemed necessary to effectively implement policies with respect to the regulation and practice of the profession. Section 6. Qualification of Board Members. No person shall be appointed a member of the Board of Accountancy unless he: a) is a citizen of the Philippines; b) is of good moral character; c) is a duly registered Certified Public Accountant in the Philippines; d) has been in the practice of accountancy for at least ten years; and e) is not directly or indirectly connected with any school, college, or university granting degrees that may qualify graduates with such degrees for admission to the Certified Public Accountant examinations, or with Certified Public Ac countants Review School or Institute, nor shall have any pecuniary interest in such school, college, university or Certified Public Accountant s Review School or Institute.