Accounting in a Nutshell

For the entire month of April and May, I have been joining workshops to help me prepare for the MBA Program. We took up courses for financial and managerial accounting, statistics, math of finance, economics, and case studies. All of these courses should teach us the basics that we need to learn before we go into the knitty gritty part of Business Administration. All of these were designed to help graduates of non-management related courses and non-accountants learn the basics of different subject matters that are essential to the MBA Program.

In line with this, I will be posting a few articles in the next few weeks to echo the things that I have learned from the workshops. I am a firm believer of the quote by Albert Einstein that says "If you can't explain it simply, you don't understand it well enough." These articles will serve as a way for me to assess if I have really grasped the concepts discussed in the workshop, if not, this will serve as a review so that I can revisit those principles and ensure that I have understood it well enough. Aside from these, this will also be a great way for others to learn more about these subject matters.

Source: Want to be an entrepreneur? Then, get your MBA!

The first part that I'd like to talk about was "Accounting" in general, specifically, we will focus more on financial accounting. Before I proceed, I'd like to point out that I am not an Accountant, I also don't have any degree related to Management. In fact, I have a Bachelor's Degree in Computer Science. The following concepts that I will be talking below are just some of the things that I have learned from the workshop. So for those who have Finance, Accounting, MBA background, please bare with me. If there are any issues on the concepts that I will be discussing, I will greatly appreciate it if you can point me in the right direction.

"Accounting" Defined

Accounting is the language of business. In a nutshell, it is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are of a financial character. In simple terms it is a way of keeping track of transactions related to money to determine a companies' profitability. It is a service activity which provides quantitative information to aid business leaders, investors, etc. in making informed decision. Through accounting, it also helps managers prepare and plan alternative courses of action.

Source: Pixabay - Money / Finance / Business

Major Types of Accounting

• Financial Accounting - provides information to decision makers who are external to the business. Examples include present and future shareholders, creditors, and government regulators. It translates economic activities into a comprehensive information that is understandable by OUTSIDERS.
• Managerial Accounting - on the other hand, provides information to decision makers who are internal to the business. And since this is only used internally, the information is not published and not made available to people outside of the business.
• Tax Accounting - involves tax compliance and tax planning. Tax compliance is basically a calculation of the company's tax liable in accordance to the law after transactions for a year has been completed. Tax planning involves a careful consideration before a transaction has taken place in order to determine tax consequences so that the management can take necessary adjustments if needed.
• Accounting Information Systems - the process and procedures required to generate accounting information.
• Nonbusiness (Non-Profit) Organization Accounting - deals with the accounting needs of organizations which do not attempt to earn a profit such as hospitals, colleges, and churches.

Financial Vs. Managerial Accounting

Financial Accounting seeks to provide information to current or future provideres of capital (creditors or investors) and other interested parties outside of managements (governments regulatory bodies such as the SEC and BIR). As discussed earlier, it is designed for public consumption. This is accomplished through periodic general purpose financial statements which provided summarized historical information on the company's financial position and results of operations. We will take the example of Cebu Air, Inc. and Subsidiaries, which goes by the name of Cebu Pacific, in the next sections.

Managerial Accounting seeks to provide information to assist managers in the effective operation of business. Typical example of the information needed is to identify best selling products, period with the most sales, demographics, etc. This is accomplished through customized management reports that tent to be more detailed in nature and may include future budgets and forecasts as well as historical data. It should also be noted that there are no standards for this, every business has its own need and priorities. And the ultimate goal for this kind of accounting is to improve management's future performance.

Source: PixaBay

Why do we need Financial Accounting?

Financial Accounting promotes the exchange of resources. I have been highlighting this in the previous sections, that it primarily aimed for OUTSIDERS. Corporations and Companies usually prepare financial statements with the goal of enticing future investors, suppliers and creditors. The goal of this accounting is to show the status and the profitability of the business. After all, businessmen and investors would always demand a return of their investments. And thus, the financial statements are a great tool to determine whether one should continue investing in a certain company. So when an investor decides to continue investing, or when a creditor decides to loan a certain amount, this will in turn equate to additional resources for the company to be used for future transactions.

So why bother creating financial statements? Aside from the fact, that is is mandated by the BIR and SEC. It is also a great tool for companies and businesses to acquire additional resources for expansion and other future plans for the business. The resources acquired today from new investments and creditors, will be the resources to be used for tomorrow.

Types of Firm Ownership.

There are generally three types of firms: Proprietorship, Partnership, and Corporations. Proprietorship is typically a small firm with one specific owner. Partnerships are medium-sized firms with shared ownerships. Corporations are large firms with diverse ownership, wherein ownership rights can be bought or sold on an open market, for publicly traded companies. But there are also corporations that are privately owned and are not publicly traded. I'd like to focus more on Corporations, as these types of firms usually have a very detailed finanacial statements.

Now let's take a look at the example of Cebu Air Inc., commonly known as Cebu Pacific. As discussed, it is mandated by the BIR and SEC for all companies to have financial statements. Everything has to be accounted for to ensure the companies are paying the right amount of taxes, and for a lot of other reasons.

If you go Cebu Pacific's website: https://www.cebupacificair.com/, you can see a section at the bottom called Investor Relations (Footer -> About Us).

This "Investor Relation" part is also mandatory for publicly traded companies. Now if you take a close look at this section, you will see the company's Financial Statements (Income Statements, Balance Sheets, Cash Flows). It shows the revenues and expenses of the company. It shows a detailed information of how the company is doing and most importantly is shows the value of this company. If you take a look at the annual reports for the company, you can see the company is literally earning billions of money in it's entire year of operation. And as discussed, financial accounting promotes the exchange of resources. So for this case, once investors and creditors knows the revenue for Cebu Pacific, it will entice them to continue investing in the company and continue lending certain amounts to the company. The accumulated investments and cash will then be used as additional resources for operations.

Footnotes

For those who are working on corporations that are privately owned, you could always ask your accountants for your income statements and other financial documents. This will give you an idea of how your company is doing, or whether you should continue working on that company or find another one. I haven't really tried asking for this financial statements, but for obvious reasons, most privately owned companies will not give out this financial statements and other documents. If that's the case, take note that for corporations, these financial statements are publicly available So you can always go to SEC and ask for a copy. You only have to pay for 10/page. :)

This article only serves as an introduction to Accounting. The next posts will discuss in great detail how these financial statements are prepared. We will not go in too much detail since the purpose of these articles is to give everyone a general perspective of how things are done; and I am not doing this to train people to become accountants/bookkeepers. We will just go over through a few concepts that could help us see how businesses are accounted in general.

I am hoping that you have learned something through this post. Stay tuned for the next post!

Cheers!