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Sometimes, businesses, especially small businesses do not maintain a full set of double entry records. Consequently, no trial balance will be produced and a complete set of final accounts cannot be prepared without further analysis of the records that do exist.
The reports generated by various streams of accounting, such as cost accounting and management accounting, are invaluable in helping management make informed business decisions. While basic accounting functions can be handled by a bookkeeper, advanced accounting is typically handled by qualified accountants who possess designations such as Chartered Accountant (CA), etc in India.
The financial statements that summarize a large company’s operations, financial position and cash flows over a particular period are concise statements based on thousands of financial transactions.
In most cases, accountants use generally accepted accounting principles (GAAP) when preparing financial statements. GAAP is a set of standards related to balance sheet identification, outstanding share measurements and other accounting issues, and its standards are based on double-entry accounting, a method which enters each expense or incoming revenue in two places on a company’s balance sheet.
To illustrate double-entry accounting, imagine a business issues an invoice to one of its clients. An accountant using the double-entry method enters a credit under the accounts receivables column and a debit under the balance sheet’s revenue column. When the client pays the invoice, the accountant debits accounts receivables and credits revenue. Double-entry accounting is also called balancing the books, as all of the accounting entries are balanced against each other. If the entries aren’t balanced, the accountant knows there must be a mistake somewhere in the ledger.
Financial accounting refers to the processes accountants use to generate the annual accounting statements of a firm. Management accounting uses much of the same processes but utilizes information in different ways. Namely, in management accounting, an accountant generates monthly or quarterly reports that a business’s management team can use to make decisions about how the business operates.
Just as management accounting helps businesses make decisions about management, cost accounting helps businesses make decisions about costing. Essentially, cost accounting considers all of the costs related to producing a product. Analysts, managers, business owners and accountants use this information to determine what their products should cost. In cost accounting, money is cast as an economic factor in production, whereas in financial accounting, money is considered to be a measure of a company’s economic performance.