Accounting is a system of gathering,
summarizing, and communicating financial information for a business firm, government, or
other organization. Accounting, also called accountancy, enables decision makers to
interpret financial information and use the results in planning for the future. For
example, such data tell executives which products or departments are doing well and which
Business people often call accounting the "language of business" because they
use accounting data in communicating about a firm's activities. Information provided by
accountants helps managers and other executives understand the results of business
transactions and interpret the financial status of their organization. With this
knowledge, managers can make informed decisions about such matters as production,
marketing, and financing. Charities, churches, colleges, government agencies, and other
nonprofit organizations also use accounting to keep track of their financial situation.
Bookkeeping is a small but important part of accounting. It involves recording financial
transactions and keeping other financial records. Most repetitive bookkeeping is done with
In the United States, publicly owned businesses are required by law to issue financial
reports. These reports are used by investors; officials of banks, government agencies, and
labor unions; and others interested in a firm or its industry. Accountants prepare the
reports, which provide summaries of a company's financial condition. Most companies issue
quarterly reports. All firms use similar accounting procedures so that the reports can be
compared. In the United States, the Financial Accounting Standards Board (FASB), a group
of professional accountants, establishes these procedures, which are called accounting
The most important financial reports include balance sheets, income statements, and
statements of cash flows. A balance sheet shows a company's assets, liabilities, and net
worth. An income statement is a report of a firm's revenue and expenses during a certain
period. The bottom line of an income statement shows whether the company had a net profit
or a net loss for that period. A statement of cash flows shows the amounts of money
flowing into a company and out of it as a result of its operating, investing, and
Organizations that do not seek a profit need many of the same kinds of financial reports.
For example, private schools must keep track of their tuition income and their expenses. A
government agency may wish to compare the cost of a program with the benefits. Possible
donors to a charity may like to see how previous donations were used.
Fields of accounting
Accountants may be classified by the type of organization for which they work. For
example, business accountants are employed by all types of companies. A small firm may
have one general accountant who handles all financial records. But a large corporation may
have many accountants for the various duties involved.
Organizations or individuals may hire professional public accountants for occasional tasks
or special accounting services. Most public accountants have passed a state examination
and obtained a license to practice as certified public accountants (CPA's). Such
accountants are called chartered accountants in Canada, the United Kingdom, and some other
Most accountants specialize in a field of accounting. The major fields include financial
accounting, management accounting, tax accounting, auditing, and management consulting
Financial accounting involves the preparation of a business's financial statements, mainly
for users outside the business. These reports are used by owners and potential owners of a
business and by people who have loaned a company money. Some government agencies that
regulate business and the stock market require companies to submit financial statements to
Management accounting helps managers plan and control a company's operations. Accountants
prepare budgets to express management's goals in financial terms. After a budget has been
adopted, performance reports compare actual results with the budget. Cost accountants help
management keep track of how much it costs a company to make the product, or provide the
service, it sells.
Tax accounting consists of preparing tax returns for organizations or individuals and
determining the taxes involved in proposed business transactions. Tax accountants suggest
ways to save money on taxes. They must have a thorough knowledge of the tax laws that
affect their clients or employers. They also must know the details of court rulings in a
wide variety of tax cases.
Auditing involves the examination of an organization's financial statements and records.
CPA auditors from outside the organization provide assurance that the organization's
financial statements present financial information fairly and that they follow generally
accepted accounting principles. People use such statements in deciding which companies to
invest in and lend money to.
Internal auditors are employees of an organization who make sure that organization follows
the accounting procedures management wants. They also seek ways to increase efficiency and
Management consulting services consist of a variety of activities that many accountants
perform. These services include the design and installation of computerized financial
information systems, assistance in setting up employee pension plans, and the planning of
an individual's personal finances.
The number of jobs in many accounting fields is growing. Increasingly sophisticated
management techniques demand information that can be provided most efficiently by
accountants. Accounting requires the ability to gather data, analyze problems completely,
and present conclusions clearly.
A college education with a major in accounting is good preparation for an accounting
career. Many organizations prefer accountants with a master's degree in accounting or
management. Many accountants become certified public accountants because they wish to
practice public accounting or to have the distinction of earning a CPA certificate.
Most accountants work for business companies or government agencies. Some have jobs with
foundations, hospitals, labor unions, universities, or other nonprofit organizations. Many
CPA's practice in public accounting firms that provide a wide range of services. In the
United States, five large public accounting firms earn most of the revenue of CPA firms.
These five firms are Arthur Andersen & Co.; Deloitte & Touche; Ernst & Young;
KPMG Peat Marwick; and PricewaterhouseCoopers.
Contributor: Robert M. Keith, C.P.A., Prof. of Accounting, Univ. of South Florida.