Accounting Systems for Managerial Decisions
This article provides a foundation for the basic accounting equation and how different types of accounting processes assist managers in making decisions. Financial accounting and managerial accounting are defined and compared and contrasted. There are nine different types of accounting transactions that can take place as a result of the basic accounting equation. However, only five of the nine transactions have a common effect on the accounting equation. The objective of financial accounting is to provide information to external decision makers, whereas, the objective of managerial accounting is to provide information to internal decision makers. There are two types of techniques utilized by decision makers in the planning process, and they are cost/value/profit (CVP) analysis and financial budgeting.
Keywords Accounting; Accounting Systems; Assets; Financial Accounting; Generally Accepted Accounting Principles (GAAP); Liabilities; Managerial Accounting; Owners' Equity; VisiCalc
Accounting: Accounting Systems for Managerial Decisions
Being familiar with financial transactions and their effects on financial reports can help accounting professionals with (1) creating new reports that will assist decision makers, (2) developing financial strategies in response to what may occur in the future, (3) creating methods of filing and tracking financial information, (4) automating financial records, and (5) filing the required income taxes (Page & Hooper, 1985). If a business or individual is involved in any type of activity that requires money, there will be a need to keep detailed and accurate records on the financial operations of all activities that transpire. Businesses are accountable to entities such as boards of directors, creditors, and various governmental agencies. Individuals tend to report information to banks and other creditors. Both businesses and individuals must report to the Internal Revenue Service at least once a year. The reports prepared tend to give the reader an idea of the financial state of the businesses or individual's affairs. Basically, the reports tell a story of how the money is being managed. The process of collecting the financial information and preparing a report has been referred to as financial accounting.
Financial accounting focuses on preparing financial statements for external decision-makers such as banks and government agencies. The primary purpose of the field is to review and monitor an organization's financial performance and report the results of the evaluation to potential stakeholders. Financial accountants are expected to create financial statements based on Generally Accepted Accounting Principles (GAAP). Financial accounting exists in order to: Produce general purpose financial statements, provide information to decision makers in the accounting field, and meet regulatory requirements.
Businesses are responsible for two tasks -- acquiring financial and productive resources and combing the two resources in order to create new resources. Acquired resources are called assets, and the different types of assets are called equities. Therefore, the foundation for the basic accounting equation is "Assets = Equities." However, since equities can be divided into two groups, the basic accounting equation can be revised to read as "Assets = Liabilities + Owners' Equity."
- Assets. Although assets consist of financial and productive resources, not all resources are considered to be assets. In order to determine if a resource is to be considered an asset, it must satisfy all three of the following criteria:
- The resource must possess future value for the business. The future value must take the form of exchange ability (i.e. cash) or usability (i.e. equipment).
- The resource must be under the effective control of the business. However, legal ownership is not mandatory. As long as the resource can be freely used in business activities, the resource will meet the asset criteria. An example would be a leased computer; although the organization may use the computer, legal rights still belongs to the leasing company.
- The resource must have a dollar value resulting from an identifiable event or events in the life of the organization. The value assigned to the asset must be tracked to an exchange between the organization and others (Page & Hooper, 1985).
If the resource does not meet all of the criteria, it cannot be reported as an asset.
- Liabilities. When someone other than the owner provides an organization with an asset, the claims against the business take the form of a debt. Sources of assets from someone other than the owner are referred to as liabilities. Liabilities are the debts and legal obligations that a business incurs as the result of acquiring the assets from non-owners.
- Owners' Equity. Some businesses may obtain assets via owner investment or sale of stock. When the owner supplies the organization with assets, the claim against those assets is called owners' equity (or stockholders' equity) in a financial report.
When a business accepts assets from a source other than the owner, it can be reported as a liability or owners' equity. However, there are some differences between these two sources.
Basic Accounting Equation Transactions
There are nine different types of accounting transactions that can take place as a result of the basic accounting equation. However, only five of the nine transactions have a common effect on the accounting equation. These transactions are:
- Increase in assets and decrease in assets (i.e. when an organization collects money that is owed to it, there is an increase in cash and a decrease in accounts receivable).
- Increase in assets and increase in liabilities (i.e. when an organization borrows money, there is an increase in cash and notes payable).
- Increase in assets and increase in owners' equity (i.e. when an owner invests money in the business, there is an increase in cash and owners' equity).
- Decrease in assets and decrease in liabilities (i.e. when a business pays off a loan, there is a decrease in cash and notes payable).
- Decrease in assets and decrease in owners' equity (i.e. when an owner decides to withdraw some assets from the business, there is a decrease in assets, usually cash, and a decrease in owners' equity since they tend to use the withdrawal for personal use).
Although organizations tend to focus a lot of time preparing financial reports for external stakeholders, the demands of an organization's management team are equally important. This group of individuals is responsible for providing direction to the organization. Therefore, it is crucial that they have access to the most up to date information regarding the organization's financial status. Therefore, the organization tends to select an accounting system that would provide...
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