Accounting is a set of concepts and techniques that are used to measure and report financial information about an economic event. Economic events involve a number of business activities such as purchase and sale of goods, payment of salaries etc. The information is potentially reported to a variety of different types of interested parties. These include business managers, owners, creditors, governmental units, financial analysts, and even employees.
Business managers need accounting information to make sound leadership decisions. Investors hope for profits that may eventually lead to distributions in the form of dividends. Creditors are always concerned about the entity’s ability to repay its obligations. Government need information for taxation and regulation. Analysts use accounting data to form opinions on which they base investment recommendations. Employees want to work for successful companies to further their individual careers, and they often have bonuses or options tied to enterprise performance.
The diversity of interested parties leads to a logical division in the discipline of accounting: financial accounting and managerial accounting. Financial accounting is concerned with external reporting of information to parties outside the firm and managerial accounting is primarily concerned with providing information for internal management. Financial accounting is targeted toward a broad base of external users, none of whom control the actual preparation of reports or have access to underlying details. Managerial accounting information is intended to serve the specific needs of business managers for business planning, controlling, and decision making.
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