Accounting comprises from two stages which are,
Financial accounting, it relates to recording day t day transactions by using double entry bookkeeping. The financial accounting makes the entries in an account which know as ledger account. This account consists from two locations which are the debits are the people that the business owes them money, and the creditors are the people which the money is owed to. For example, assets will increase debts and will decrease credit and liabilities will decrease debits and will increase credit and capital.
The reason why there are two locations in a ledger account is because it will make it easy for the financial accounting to add the credits and the debits which means to know how much money they owe and how much money the people owe them. And also because the business gives and receive which gives value to the transactions made.
The purpose of financial accounting it provides the business with financial statement because they keep a record of day to day transactions, and they also produce profit and lost account and cash flow forecast which they will present to management accounting which are the second stage of accounting in order to help them to make important decisions and on time.
Additionally petty cash also is another method that is used to record day to day transactions that relates to low value items such as coffee, as well as trial balance is used to ensure and confirms that the information in the ledger account are correct because the numbers on the trial balance has to be the same as in the ledger account.
Management accounting, it is the second stage of accounting, its purpose is to identify and interpret the information presented such as cash flow forecast and profit and lost account in order to make decision and control the costs for example if the cash flow forecast shows that the business is not making any profit as a result of high expenditure then the business might think of how to reduce it for example increase their sales.
Management accounting also plane and create a different strategic in order to make improvements and ensure that they make an effective decisions. In addition management accounting also disclose the information found to the internal users such as,
Employees the purpose of accounting for them is, they have to know the business financial situation for example if the business financial situation is not well then they might make some employees redundant which means the employees might loss their jobs for example there are many organisations that has being running for years they made their employees redundant as result of the credit crunch. Knowing the business financial situation will also enable the employees to know whether they are going to get paid on time or there will be a delay.
And external users such as,
The current share holders, the purpose of accounting for them, it will indicate for them how the business is progressing which will help them to know if they are going to get any money form that business and how much they will get as they have a share on that business.
Prospective investors are the people that are willing to invest money in that particular business. The purpose of accounting for them is that it will help them to make decisions on whether to invest money on that business or not, (depends on that business financial situation).
Loan providers are the people that provide the business with a loan. The purpose of accounting for them, is that will show them the business financial situation so they can decide whether that business is able to pay back the loan if they provide it for them or not.
Debits and credits, debits are the people that the business owes them money, and the creditors are the people which the money is owed to. The purpose of accounting for them is, the creditors will decide whether to supply that business and for the debtors to decide whether to land money for that business.
The government, the purpose of accounting is it will enable them to know how much tax they will have to deduct from that particular organisation also have to keep the businesses financial statement in their record because all the business are controlled by the government policies and they all have to be licensed. In addition the purpose of accounting for the government is also to assemble national economic statistic which are used in many and different ways in controlling the economy.
