Users of Accounting Information, Branches OF Accounting, Forms OF BUS ORGS PDF

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Users of Accounting Information

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Creditors and lenders. Should a loan be granted to the company? Will the company be able to pay its debts as they become due?

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Employees and their unions. Does the company have the ability to pay increased wages? Is the company financially able to provide long-term employment for its workforce? Customers. Does the company offer useful products at fair prices? Will the company survive long enough to honor its product warranties? Governmental units. Is the company, such as a local public utility, charging a fair rate for its services? General public. Is the company providing useful products and gainful employment for citizens without causing serious environmental problems?

The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. Three primary users of accounting information were previously identified, Internal users, External users, and Government/ IRS. Each group uses accounting information differently, and requires the information to be presented differently. Internal Users

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Accounting supplies managers and owners with significant financial data that is useful for decision making. This type of accounting in generally referred to as managerial accounting. Some of the ways internal users employ accounting information include the following: 

Assessing how management has discharged its responsibility for protecting and managing the company’s resources

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Shaping decisions about when to borrow or invest company resources

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Shaping decisions about expansion or downsizing

Some of the ways external users employ accounting information include the following: 

Stockholders have the right to know how a company is managing its investments

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Federal and State Governments require tax returns and other documents often prepared by accountants

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Banks or lending institutions may use accounting information to guide decisions such as whether to lend or how much to lend a business

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Investors will also use accounting information to guide investment decisions

External Users Typically called financial accounting, the record of a business’ financial history for use by external entities is used for many purposes. The external users of accounting information fall into six groups; each has different interests in the company and wants answers to unique questions. The groups and some of their possible questions are: 

Owners and prospective owners. Has the company earned satisfactory income on its total investment? Should an investment be made in this company? Should the present investment be increased, decreased, or retained at the same level? Can the company install costly pollution control equipment and still be profitable?

General-purpose financial statements provide much of the information needed by external users of financial accounting. These financial statements are formal reports providing information on a company’s financial position, cash inflows and outflows, and the results of operations. Many companies publish these statements in annual reports, also known as a 10-K or a 10-Q (quarterly report). The annual report contains the independent auditor’s opinion as to the fairness of the financial statements, as well as information about the company’s activities, products, and plans. Typically, the best place to find these reports for a public company can be on their website under the Investor relations section. Financial statements used by external entities are prepared using generally accepted accounting

principles, or GAAP. We will discuss the language of GAAP further in later sections. Government / IRS Government agencies that track and use taxes are interested in the financial story of a business. They want to know whether the business is paying taxes according to current tax laws. The language in which tax-related financial statements are prepared is called IRC or Internal Revenue Code. Tax preparation will be outside the scope of this course. IMPORTANT POINTS TO REMEMBER 

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Internal users are people within a business organization who use financial information. Examples of internal users are owners, managers, and employees. External users are people outside the business entity (organization) who use accounting information. Examples of external users are suppliers, banks, customers, investors, potential investors, and tax authorities.

INTRODUCTION TO ACCOUNTING As a result of economic, industrial, and technological developments, different specialized fields in accounting have emerged. The famous branches or types of accounting include: financial accounting, managerial accounting, cost accounting, auditing, taxation, AIS, fiduciary, and forensic accounting. 1. Financial Accounting Financial accounting involves recording and classifying business transactions, and preparing and presenting financial statements to be used by internal and external users. In the preparation of financial statements, strict compliance with generally accepted accounting principles or GAAP is observed. Financial accounting is primarily concerned in processing historicaldata. 2. Managerial Accounting Managerial or management accounting focuses on providing information for use by internal users, the management. This branch deals with the needs of the management rather than strict compliance with generally accepted accounting principles.

Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions, and similar areas. 3. Cost Accounting Sometimes considered as a subset of management accounting, cost accounting refers to the recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in manufacturing businesses since they have the most complicated costing process. Cost accountants also analyze actual and standard costs to help managers determine future courses of action regarding the company's operations. 4. Auditing External auditing refers to the examination of financial statements by an independent party with the purpose of expressing an opinion as to fairness of presentation and compliance with GAAP. Internal auditing focuses on evaluating the adequacy of a company's internal control structure by testing segregation of duties, policies and procedures, degrees of authorization, and other controls implemented by management. 5. Tax Accounting Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax returns. It also involves determination of income tax and other taxes, tax advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax decisions, and other tax-related matters. 6. Accounting Information Systems Accounting information systems (AIS) involves the development, installation, implementation, and monitoring of accounting procedures and systems used in the accounting process. It includes the employment of business forms, accounting personnel direction, and software management. 7. Fiduciary Accounting Fiduciary accounting involves handling of accounts managed by a person entrusted with the custody and management of property of or for the benefit of another person. Examples of fiduciary accounting include trust accounting, receivership, and estate accounting. 8. Forensic Accounting Forensic accounting involves court and litigation cases, fraud investigation, claims and dispute resolution, and

As a sole proprietor you can operate any kind of business as long as you are the only owner. It can be full-time or part-time work. This includes operating a:

other areas that involve legal matters. This is one of the popular trends in accounting today. Focusing on a Specialization If you want to focus on a specialization, you may want to consider obtaining an accounting certification in your chosen field. It will give you an edge over those who are uncertified. Due to the increasing population and demand for competitive professionals, you need to step it up a little to get recognized. Some of the most famous certifications include the Certified Public Accountant (CPA), Certified Management Accountant (CMA), Certified Internal Auditor (CIA), Certified Financial Planner (CFP), and Certified Information Systems Auditor (CISA). FORMS OF BUSINESS ORGANIZATIONS Before you consult with a tax advisor or consultant you may want to do some research yourself. One of your first decisions as a business owner is what form of business you choose. This decision is very important because it can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money. Business formation is controlled by the law of the state where your business is organized. The most common forms of businesses are: 

Sole Proprietorships

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Partnerships

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Corporations

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Limited Liability Companies (LLC)

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Subchapter S Corporations (S Corporations) While state law controls the formation of your business, federal tax law controls how your business is taxed. All businesses must file an annual return. The form you use depends on how your business is organized. The answer to the question "What structure makes the most sense?" depends on the individual circumstances of each business owner. One form is not necessarily better than any other. Each business owner must assess their own needs. Here is a brief look at the various business forms. Sole Proprietorship A sole proprietorship is the most common form of business organization. It's easy to form and offers complete control to the owner. But the business owner is also personally liable for all financial obligations and debts of the business.

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Shop or retail trade business

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Large company with employees

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Home-based business

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One-person consulting firm Every sole proprietor is required to keep sufficient records to comply with federal tax requirements regarding business records. Your net business income or loss is combined with your other income (other income could be your salary if you also work for someone else, or your investments) and deductions and taxed at individual rates on your personal tax return. Sole proprietors do not have taxes withheld from their business income so you may need to make quarterly estimated tax payments. You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. Partnership A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. Each partner reports his share of the partnership net profit or loss on his personal tax return. Partners must report their share of partnership income even if a distribution is not made. Partners are not employees of the partnership and so taxes are not withheld from any distributions. Like sole proprietors, they generally need to make quarterly estimated tax payments if they expect to make a profit. Corporation A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at the individual tax rates on their personal annual tax returns. The corporation becomes an entity that handles the responsibilities of the business. Like a person, the

corporation can be taxed and can be held legally liable for its actions. If you organize your business as a corporation, you are generally not personally liable for the debts of the corporation. (Exceptions may exist under state law.) Limited Liability Company A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. Most states also permit "single member" LLCs, those having only one owner. Subchapter S Corporation The Subchapter S Corporation is a variation of the standard corporation. The S corporation allows income or losses to be passed through to individual tax returns, similar to a partnership. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income....