Tuesday, March 11, 2008

Accounting and auditing

Accounting and auditing is one of the most important aspects of business. And even though you are a big fish in the business world and you have all the accounting done by your own accountant, fine, but you have to know basic things. The same goes for auditing. Just like I've said before, education is the key to financial success. The more you know, the more you earn. Simple as that. I will not go in-depth, just very basic things, just what you really need to know.


  • Accounting involves recording and summarizing an organization's transactions or business deals, such as purchases and sales, and reporting them in the form of financial statements. In many countries, the accounting or accountancy profession has professional organizations which operate their own training and examination systems, and make technical and ethical rules: these relate to accepted ways of doing things.
  • Bookkeeping is the day-to-day recording of transactions.
  • Financial accounting includes bookkeeping, and preparing financial statements for shareholders and creditors (people or organizations who have lent money to a company).
  • Management accounting involves the use of accounting data by managers, for making plans and decisions.

Auditing means examining a company's systems of control and the accuracy or exactness of its records, looking for errors or possible fraud: where the company may have deliberately given false information.
  • An internal audit is carried out by a company's own accountants or internal auditors.
  • An external audit is done by independent auditors: auditors who are not employees of the company.
The external audit examines the truth and fairness of financial statements. It tries to prevent what is called 'creative accounting', which means recording transactions and values in a way that produces a false result - usually an artificially high profit.
There is always more than one way of presenting accounts. The accounts of British companies have to give a true and fair view of their financial situation. This means that the financial statements must give a correct and reasonable picture of the company's current condition.

Laws, rules and standards

In most continental European countries, and in Japan, there are laws relating to accounting, established by the government. In the US, companies whose stocks are traded on public stock exchanges have to follow rules set by the Securities and Exchange Commission (SEC), a government agency. In Britain, the rules, which are called standards, have been established by independent organizations such as the Accounting Standards Board (ASB), and by the accountancy profession itself. Companies are expected to apply or use these standards in their annual accounts in order to give a true and fair view.
Companies in most English-speaking countries are largely funded by shareholders, both individuals and financial institutions. In these countries, the financial statements, are prepared for shareholders. However, in many continental European countries business are largely funded by banks, so accounting and financial statements are prepared for creditors and the tax authorities.

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