This is the role of financial accountants. Tax accounting couples legal obligations with financial accounting to ensure adherence to current tax laws. Tax accounting is relatively simple to explain, though nuanced in execution.
In short, every region has specific tax accounting rules and regulations. Tax accounting is therefore a combination of legal and financial knowledge. On the strategic side of this, tax accountants can consider any tax implications as it pertains to certain strategic decisions or tactics. For example, some manufacturers can receive tax breaks for environmentally friendly operations, often high enough tax breaks to offset the cost of implementing them.
Tax accountants should be aware of these opportunities in the legal environment. More tangibly, tax accounts will focus on the preparation, analysis, and presentation of tax payments and tax returns at all times. There are specialized accounting principles and obligations for each area of operation which must be met.
Keeping up to date on what is expected, and ensuring alignment on across the organization, is their primary responsibility. Some exceptions exist, of course, such as non-profit organizations. Non-profits have unique tax preparation requirements due to their no-tax status. This comes along with its fair share of obligations, paperwork, and approvals from the governing bodies.
Various Accounting Perspectives : This image demonstrates the various responsibilities and perspectives of different forms of accounting those being tax accounting, managerial accounting and financial accounting. Governmental and nonprofit accounting follow different rules from those of commercial enterprises.
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. Accounting : Governmental and Nonprofit accounting follow different rules to those of commercial enterprises.
There is an important difference between private sector accounting and governmental accounting. The main reasons for this difference is the environment of the accounting system.
Also, in government accounting, the entity has the responsibility of fiscal accountability which is demonstration of compliance in the use of resources in a budgetary context. In the private sector, the budget is a tool in financial planning and it is not mandatory to comply with it. Government accounting refers to the field of accounting that specifically finds application in the public sector or government.
The unique objectives of government accounting do not preclude the use of the double entry accounting system. There can, however, be other significant differences with private sector accounting practices, especially those that are intended to arrive at a net income result. Thus, a special field of accounting exists because:. The objectives for which government entities apply accountancy can be organized in two main categories:. The governmental accounting system has a different focus for measuring accounting than private sector accounting.
Rather than measuring the flow of economic resources, governmental accounting measures the flow of financial resources. Instead of recognizing revenue when they are earned and expenses when they are incurred, revenue is recognized when there is money available to liquidate liabilities within the current accounting period, and expenses are recognized when there is a drain on current resources.
Early accounts served mainly to assist the memory of the businessperson, and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the fourteenth century, where trading ventures began to require more capital than a single individual was able to invest.
The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information. This development resulted in a split of accounting systems for internal i. Privacy Policy. Skip to main content. Financial Statements. Search for:. Accounting Information. Usage of Accounting Information Accounting is the vehicle for reporting financial information about a business entity to many different groups of people.
Learning Objectives Explain the history of accounting and how accounting information is useful. Double-entry bookkeeping first emerged in Northern Italy in the 14th century, where trading ventures began to require transactions that involved more than one investor.
Management or internal accounting and financial or external accounting are generally the two key branches of accounting. Management accounting provides relevant and useful information to people inside the business, such as employees, managers, owners and auditors.
It provides information for decision making and company strategy. Financial accounting, on the other hand, also provides information to people outside the business, such as investors, regulators, analysts, economists, and government agencies. Key Terms double-entry bookkeeping : A method of bookkeeping in which each transaction must have at least one debit and one credit.
Financial statements : Standardized documents that include the financial information of a person, company, government, or organization; this information is used to make financial decisions. Some examples are suppliers, customers, and the community. Managerial Accounting Through integrating accounting knowledge with strategic decision-making, organizations can improve performance, refine strategy, and mitigate risk.
Income statements are often shared as quarterly and annual reports, showing financial trends and comparisons over time. While the definition of an income statement may remind you of a balance sheet, the two documents are designed for different uses. An income statement tallies income and expenses; a balance sheet , on the other hand, records assets, liabilities, and equity. Accountants create income statements using trial balances from any two points in time.
Accountants, investors, and business owners regularly review income statements to understand how well a business is doing in relation to its expected performance, and use that understanding to adjust their actions.
A business owner whose company misses targets might, for example, pivot strategy to improve in the next quarter. This includes:. For example, revenue is often split out by product line or company division, while expenses may be broken down into procurement costs, wages, rent, and interest paid on debt. The difference between the two is in the way a statement is read and the comparisons you can make from each type of analysis.
Vertical analysis refers to the method of financial analysis where each line item is listed as a percentage of a base figure within the statement.
For each reporting entity, a statement of financial position is required. The statement presents assets at estimated current values, liabilities at the lesser of the discounted amount of cash to be paid or the current cash settlement amount, and net worth. A provision should also be made for estimated income taxes on the differences between the estimated current value of assets. Comparative statements for one or more periods should be presented.
A statement of changes in net worth is optional. A company is considered to be a development stage company if substantially all of its efforts are devoted to establishing a new business and either of the following is present: 1 principal operations have not begun, or 2 principal operations have begun but revenue is insignificant. Activities of a development stage enterprise frequently include financial planning, raising capital, research and development, personnel recruiting and training, and market development.
A development stage company must follow generally accepted accounting principles applicable to operating enterprises in the preparation of financial statements. In its balance sheet, the company must report cumulative net losses separately in the equity section. In its income statement it must report cumulative revenues and expenses from the inception of the enterprise. Likewise, in its cash flow statement, it must report cumulative cash flows from the inception of the enterprise.
Its statement of stockholders' equity should include the number of shares issued and the date of their issuance as well as the dollar amounts received. The statement should identify the entity as a development stage enterprise and describe the nature of development stage activities.
During the first period of normal operations, the enterprise must disclose its former developmental stage status in the notes section of its financial statements. Fraudulent financial reporting is defined as intentional or reckless reporting, whether by act or by omission, that results in materially misleading financial statements.
Fraudulent financial reporting can usually be traced to the existence of conditions in either the internal environment of the firm e. Excessive pressure on management, such as unrealistic profit or other performance goals, can also lead to fraudulent financial reporting. The legal requirements for a publicly traded company when it comes to financial reporting are, not surprisingly, much more rigorous than for privately held firms.
And they became even more rigorous in with the passage of the Sarbanes-Oxley Act. This legislation was passed in the wake of the stunning bankruptcy filing in by Enron, and subsequent revelations about fraudulent accounting practices within the company.
Enron was only the first in a string of high-profile bankruptcies. Serious allegations of accounting fraud followed and extended beyond the bankrupt firms to their accounting firms. The legislature acted quickly to fortify financial reporting requirements and stem the decline in confidence that resulted from the wave of bankruptcies. Without confidence in the financial reports of publicly traded firms, no stock exchange can exist for long. The Sarbanes-Oxley Act is a complex law that imposes heavy reporting requirements on all publicly traded companies.
Meeting the requirements of this law has increased the workload of auditing firms. In particular, Section of the Sarbanes-Oxley Act requires that a company's financial statements and annual report include an official write-up by management about the effectiveness of the company's internal controls.
This section also requires that outside auditors attest to management's report on internal controls. An external audit is required in order to attest to the management report. Private companies are not covered by the Sarbanes-Oxley Act.
However, analysts suggest that even private firms should be aware of the law as it has influenced accounting practices and business expectations generally. The preparation and presentation of a company's financial statements are the responsibility of the management of the company. Published financial statements may be audited by an independent certified public accountant.
In the case of publicly traded firms, an audit is required by law. For private firms it is not, although banks and other lenders often require such an independent check as a part of lending agreements.
During an audit, the auditor conducts an examination of the accounting system, records, internal controls, and financial statements in accordance with generally accepted auditing standards. The auditor then expresses an opinion concerning the fairness of the financial statements in conformity with generally accepted accounting principles.
Four standard opinions are possible:. The financial statements are the responsibility of the company's management; the audit was conducted according to generally accepted auditing standards; the audit was planned and performed to obtain reasonable assurance that the statements are free of material misstatements, and the audit provided a reasonable basis for an expression of an opinion concerning the fair presentation of the audit.
The audit report is then signed by the auditor and a principal of the firm and dated. May-June Kwok, Benny K. Accounting Irregularities in Financial Statements. Gower Publishing, Ltd. Taulli, Tom. Ross Publishing,
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