The Rochester Institute of Technology's Saunders College of Business describes accounting as an information science, which is used to gather, categorize and manipulate financial data. Those who use accounting information can gauge an organization's financial health by analyzing related documents, such as balance sheets and income statements. Although accounting information can be stored in hard copy, companies generally use computerized systems.
The people analyzing accounting data may work internally for an organization. They include:
- Executives and managers, such as sales executives or human resources managers, who forecast and plan for the company.
- Employees who work in accounting and analyst roles.
- Owners, including active or managing partners.
People who work outside of the organization use accounting information as external users. They include:
- Suppliers or lenders that need to determine the company's financial stability before providing credit or loans.
- Investors that want to measure the viability of putting money into a particular company.
- Regulatory bodies, such as tax and compliance agencies, that need to ensure the organization is adhering to industry and government standards.
An organization amasses various accounting records throughout the course of conducting business, such as invoices and journals relating to accounts receivable and payroll. Among the major documents collected are financial statements that help users evaluate the company's profitability and ability to meet its long-term financial goals. The two major reports used for this purpose are:
The Balance sheet, which summarizes the organization's assets, liabilities and shareholders' equity for a specific moment in time, such as all transactions recorded by a specific date. Inventory, cash and property are examples of assets. Payroll, accounts payable and notes payable to lenders are liabilities. The capital investment amount of each shareholder is the shareholders' equity. The balance sheet follows a simple formula: liabilities + shareholders' equity = assets.
The Income Statement, sometimes called the profit and loss statement, is used to measure the company's profitability over a certain period of time, such as for three months ending at a certain date. The first part of the income statement reflects revenues such as sales generated by the company and interest paid to the business, and gains such as income received from selling long-term assets. The second part of the income statement shows expenses such as cost of goods sold and payroll, and losses such as losses on lawsuits or on the sale of long-term assets.
A statement of cash flow is a financial statement that shows how the company's cash is being generated and spent. It reflects exactly how much cash is coming in and going out of the business and whether the company has enough money to pay its expenses and buy assets. The document is also useful in determining which costs to cut.
A core Generally Accepted Accounting Principle is that the information being recorded in the accounting system must be verifiable by objective evidence. This rule is called the reliability or objectivity concept, and the goal is to ensure that the information depicted in financial records are representative of the company's actual conditions. Objective evidence that may be used to verify accounting information include:
- Promissory notes
- Bank records
- Canceled checks
Principles relevant to reliability include security, which promotes giving limited system access only to authorized users; privacy, which ensures customer information is being properly gathered, disclosed and applied; and confidentiality, which safeguards sensitive information from inappropriate disclosure. The accounting system must also be available to fulfill company goals, and integrity must be used when processing accounting data.