What is Accounting?

Accounting refers to providing financial information of a company to help its stakeholders and employees make rational and economic decisions. Accounting also includes the company’s transactions, financial analysis, and reporting to financial regulators and tax collection agencies. This process is an essential factor in all companies’ decision-making, planning, and economic aspects, regardless of the company’s size. There are various types of accounting, and the types of accounting used vary depending on the type of organization.

Types of Accounting

• Financial Accounting refers to a series of processes used to prepare accounting reports in financial statements and publish them outside the company through records and classification of corporate management activities. In other words, financial accounting is a process centered on preparing financial statements, which helps companies’ external stakeholders make rational decisions. Financial accounting is the most comprehensive type of corporate accounting and has the characteristic of expressing the flow of capital poured into a company and calculating resource distribution. Finally, financial accounting is a type of accounting that shows the company’s past performance and results. It is not an accounting type for the company’s plans.
• Management accounting refers to the process of generating accounting reports that help determine how a company operates and is an accounting that aims at internal reporting in the opposite concept of financial accounting. In addition, management accounting is prepared to provide information to help company management make effective business decisions. Finally, management accounting provides the elements necessary for the company’s policy established by the company’s management and enables efficient corporate operation. As described above, management accounting is future-oriented as opposed to past-oriented financial accounting.
• Cost accounting is a process necessary for a company to decide costs. Cost accounting considers all costs used in a company’s product production, and money in financial accounting is considered a factor that measures a company’s business performance. In contrast, cash in cost accounting is regarded as an economic factor necessary in the production process. In addition, cost accounting is not only used in the production process of a company but also the services and businesses provided by the company. An important measure in cost accounting is the break-even point, which is calculated by identifying various costs such as labor costs, material costs, and maintenance costs required by companies in product production. Cost accounting focuses on the future of a company rather than a way to grasp past performance.
• Government accounting is a comprehensive type of accounting that includes financial transaction records and economic activities and processes of government companies. The purpose of government accounting is to protect government assets, report on resource management, and provide information for government policy decisions. In addition, it is used to compare work plans with actually implemented tasks and provides information necessary to predict the results of alternatives to various excuted tasks.
• Tax accounting is an accounting method that calculates taxation on corporate income by each country’s tax laws and tax regulations. Tax accounting is based on the Commercial Act, rules on accounting processing, and corporate accounting standards and has many differences from other types of corporate accounting. In addition, tax accounting requires accountants to be aware of various tax laws that change every year.

Accounting Regulations

Generally Accepted Accounting Principles (GAAP)

What is GAAP?

GAAP refers to accounting standards, including accounting regulations and accounting practice guidelines. This accounting standard is determined by the Financial Accounting Standards Board (FASB). The goal of GAAP is to deliver clear financial information in the accounting method and ensure that the company’s financial statements are complete and consistent, and comparable to other financial accounts. In other words, GAAP is a combination of general accounting standards and general methods of using accounting information.

Nine principles that accountants should follow

1. Principle of Regularity: Accountants must follow the rules of GAAP and conduct accounting work.
2. Consistency: Accountants should apply the same criteria to preparing accounting reports to facilitate comparison. Financial statements that differ from or change the criteria should explain the reason.
3. Sincerity: Accountants must give an accurate and honest explanation of the financial situation of a company.
4. Principle of Non-Compensation: Accountants must ensure transparency in both negative and positive factors, regardless of debt compensation.
5. Principle of Prudence: Financial data that is not disturbed by speculation should be expressed.
6. Principle of Continuity: Accountants should assume that corporate operations continue when evaluating corporate assets.
7. Principle of Periodicity: Accountants must report accounting information periodically. For example, a company’s profits should be informed during the relevant accounting period.
8. Principle of Materiality: Accountants must fully apply all financial information and accounting data to financial reports.
9. Principle of good faith: Entrepreneurs must remain honest in all business transactions.

Although it is not mandatory for unlisted companies to apply GAAP when preparing accounting reports, accounting methods that do not use GAAP can give a bad impression to many investors and creditors. In addition, most financial institutions often require GAAP-compliant financial statements when lending business payments, so most companies conduct accounting activities in compliance with GAAP.

Types of Accounting Information

             Accounting information is information derived through the accounting process and refers to various financial information used in the decision-making of stakeholders and executives, and employees of a company. In other words, this is the basis for corporate owners, management, investors, creditors, employees, governments, and researchers to make company-related decisions. Since the required accounting information is different for each person at each location, accounting information is usually classified into different types.

• Accounting Information on Financial Performance and Position

This type of accounting information is basic accounting information representing a company’s financial position. Corporate employees can know the company’s financial status through this accounting information. If the company’s net profit is high, all company officials can demand compensation for the company’s profits. For example, employees can request a raise in salary, and company shareholders can demand more dividends. In addition, investors may invest in the company by looking at the company’s net profit and positively predicting the future. In other words, it is accounting information that provides the company’s financial performance to those involved.

• Accounting Information for Total Cost and Per Unit Cost

This type of accounting information provides accounting information for total and unit costs consumed in producing a company’s products. To sell a company’s products or services in the market, this accounting information must be recognized. When determining the price of a product, a company can adjust the price based on information on production costs.

• Accounting Information of Business Plan and Control

It refers to accounting information necessary for a company to establish a business plan or control its business. Usually, this accounting information is collected based on the results of management accounting. As an example of accounting information of a business plan, if you want to change the payment with the creditor, the average conversion period of the creditor can be confirmed based on this accounting information. In addition, accounting information to control the business can also be obtained through this type. For example, information through cash flow statements helps control cash used in corporate activities, investments, and financial activities.

• Accounting information on tax management

 It is one of the important types of corporate activities. It is information that collects tax-related information to help identify tax reductions and tax amounts. To calculate a company’s income tax, information on corporate profits is first required. Collecting and organizing this accounting information requires more profound tax accounting knowledge.

• Accounting Information for Social Responsibility

Companies also need social accounting that provides information such as social benefits and the cost of natural resources they acquire. Social accounting information also includes safety for products supplied by companies, financial benefits related to workforce, customer satisfaction, and control related to environmental pollution.

Accounting information exists in different ways according to various goals related to corporate activities. Company officials can check the accounting information they need according to the type.

Users of Accounting Information

Accounting information is classified in various ways according to the purpose and user. Accounting information applies equally to everyone to help make decisions related to corporate activities, but accounting information users can be classified as internal and external users.

Internal users can evaluate whether the company’s management has effectively performed resource management using accounting information. In addition, it is possible to establish a plan for lending or investing in company resources and to make a decision on business expansion or reduction.

The following are representative internal users of accounting information.

1. Management: The company’s management mainly uses accounting information for budget measurement, analysis, and financial decision-making. Accounting information is also reviewed to comply with all legal regulations in business decision-making.
2. Owner: The company owner uses accounting information to identify the customer’s investment status and check the return on investment. In addition, it monitors the capital invested by companies and evaluates their investment results. Finally, accounting information is one of the essential elements to be checked when grasping the overall progress of the project.
3. Employees: Full-time or part-time employees of the company try to check the company’s financial situation and maintain the company’s employment stability and compensation system.

External users include external stakeholders or investors, borrowers, customers, etc., of the company. Accounting information for external users is mainly composed of information collected from the financial accounting process.

The following are representative external users of accounting information.

1. Investors: They refer to accounting information to see how companies use the resources they have invested in. In addition, accounting information also helps decide to expand or reduce investment. Finally, potential investors use it to understand the current investment situation and financial health in business.
2. Lenders: Financial institutions that provide loans in the form of cash or resources refer to corporate accounting information to evaluate the financial stability of a company. In addition, creditworthiness is evaluated by looking at a company’s financial ratio and financial statements through accounting information.
3. Regulatory agencies (tax agencies): They refer to accounting information to ensure that the company complies with accounting principles and regulations. Accounting information is also required for accurate tax calculations of companies. The ultimate goal of regulators is to maintain fair business activities and protect investors.
4. Customers: buyers, producers, and retailers of corporate products or services also belong to customers. They require accounting information to determine the speed of a company’s product production or the cycle of inventory inflow. In addition, through accounting information, retailers or manufacturers who receive corporate products can grasp the partner’s financial status.
5. Supplier: The supplier cooperating with the company refers to accounting information to evaluate the company’s repayment ability. In addition, the credit limit and payment conditions between the company and the supplier can be set based on accounting information.

The Regulatory Framework

International Accounting Standards Board (IASB) is a private organization formed to unify accounting standards internationally by enacting financial accounting standards and regulations. The organization was established in London, England, in 1973. The criteria and regulations set by the Board are not legally enforceable, but many countries comply with these standards and regulations. Collaboration between foreign companies has become easier as companies in many countries follow the standards and rules of IASB.

International Financial Reporting Standards (IFRS) is an accounting standard established by IASB to uniform corporate accounting processes and financial statements. IFRS stipulated standards for the preparation of financial statements, accounting information systems, overall financial reporting systems, accounting laws, etc. Currently, IFRS is an accounting standard commonly used by global stock markets and international investors.

The universally recognized International Accounting Standards Board has become an official institution by agreeing to a new constitution in the UK. The Constitution stipulated that the board of directors appoint the Standards Advisory Council (SAC). The SAC appointed in IASB plays a pivotal role in determining the priorities of the Board’s work, providing the criteria for financial statements to users and authors of the financial statements, and consulting the Board members. Usually, the SAC holds meetings three times a year, advises on projects carried out by the Board, and discloses the contents of the meetings to the public.

The Roles of IASB

The purpose of the Board’s establishment is to unify accounting standards internationally. To achieve the goal, IASB must develop and promote agendas following the terms of consultation with the board of directors and the public, and publish appropriate IFRS amendments and drafts following the Constitution. Finally, IASB is responsible for final approval for the formal publication and issuance of IFRS.

Current Ratio

The current ratio refers to the ratio that measures a company’s short-term debt repayment capacity. In addition, it is also a tool to measure a company’s ability to be overdue for a short period within a year. The characteristic of the current ratio is the rate of all current liabilities and current assets of a company. Thus, the current ratio can also be called the operating capital ratio.

Acid-Test Ratio

This ratio is also called a quick ratio. It is an indicator that can analyze whether a company’s short-term assets are enough to cover short-term liabilities through the company’s balance sheet. Through this ratio, you can identify a company’s short-term assets and know the most effective short-term assets to pay off short-term debts. When calculating this ratio, it does not include current assets that a company will hold for a long time.

Debt – Equity Ratio

 this ratio is a significant indicator frequently used in a company’s financial activities. It is used to evaluate a company’s financial capabilities. The formula for calculating this ratio is to divide a company’s debt by total shareholder capital.

Profit Margin

Profit margin is one of the indicators used by companies to measure profits from corporate activities. In addition, it is an indicator that can compare a company’s annual profit ratio. Usually, the formula for this ratio is to divide income by revenue.

Return on Owners’ Equity

The return on equity capital is calculated by dividing the net profit of a company by the owner’s capital. Since the owner’s equity capital is the company’s assets minus liabilities, ROE is considered the company’s net return. ROE can measure how efficient the profitability of corporate activities is.

References

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