Capili, Joane T.

BSMA-3B

These illustrates the large domain of accounting with three components: tax accounting, financial
accounting, and management accounting. Two types of data sources are displayed in the upper
right. The upper source is from financial transactions and bookkeeping, such as purchases and
payroll. The lower source is non- financial measures, such as payroll hours worked, retail items
sold, or gallons of liquid produced.

Tax accounting is the means of accounting for tax purposes. It applies to everyone—individuals,
businesses, corporations, and other entities. Even those who are exempt from paying taxes must
participate in tax accounting. The purpose of tax accounting is to be able to track funds (funds
coming in as well as funds going out) associated with individuals and entities.

Under GAAP, companies must follow a common set of accounting principles, standards, and
procedures when they compile their financial statements by accounting for any and all financial
transactions.

Balance sheet items can be accounted for differently when preparing financial statements and
tax payables. For example, companies can prepare their financial statements implementing the
first-in-first-out (FIFO) method to record their inventory for financial purposes, yet they can
implement the last-in-first-out (LIFO) approach for tax purposes. The latter procedure reduces
the current year's taxes payable.
While accounting encompasses all financial transactions to some degree, tax accounting focuses
solely on those transactions that affect an entity's tax burden, and how those items relate to
proper tax calculation and tax document preparation. Tax accounting is regulated by the Internal
Revenue Service (IRS) to ensure that all associated tax laws are adhered to by tax accounting
professionals and individual taxpayers. The IRS also requires the use of specific documents and
forms to properly submit tax information as required by law.

The financial accounting component is intended for external reporting, such as for regulatory
agencies, banks, stockholders, and the investment community. Financial accounting follows
compliance rules aimed at economic valuation, so it typically isn’t adequate or sufficient for
decision making. “Accounting” encompasses all of a company’s financial transactions. A well-
managed accounting department will have set policies and procedures for expenses, data
management, and the generation of financial reports.

Financial accounting is concerned specifically with the generation of these reports, that they are
based on accurate information and follow Generally Accepted Accounting Principles (otherwise
known as GAAP). GAAP is a set of financial statement reporting rules set by the Financial
Accounting Standards Board. It covers a wide array of topics, including accounting practices and
how financial statements are presented.

All publicly traded companies are required to follow GAAP. Private companies may follow
GAAP or prepare financial statements based on another comprehensive basis of accounting, such
as tax-basis or cash-basis financial statements. And the tax accounting component is its own
world of legislated rules.

Our area of concern—the management accounting component—can be subdivided into three

categories: (1) cost accounting, (2) cost reporting and analysis, and (3) decision support with cost
planning. Cost accounting is used by a company's internal management team to identify all
variable and fixed costs associated with the production process. It will first measure and record
these costs individually, then compare input costs to output results to aid in measuring financial
performance and making future business decisions. There are many types of costs involved in
cost accounting, which are defined below. represent methods used to measure and record the cost
of direct materials, direct labor, and factory overhead. There are three cost measurement
methods: actual costing, normal costing, and standard costing.

To oversimplify a distinction between financial and management accounting, financial

accounting is about valuation, and management accounting is about value creation through good
decision making.

The three management accounting subcomponents in Figure 4 are recipients of inputs from the
“cost measure- ment” procedure of transforming incurred expenses (or their obligations) into
calculated costs:
Cost accounting represents the assignment of expenses into outputs, such as the cost of goods
sold and the value of inventories. This box primarily provides external reporting to comply with
regulatory agencies.
Cost reporting and analysis represents the in- sights, inferences, and analysis of what has already
taken place in the business in order to track performance.
Decision support with cost planning involves decision making. It also represents using the
historical cost reporting information in combination with other economic information, including
forecasts and planned changes (such as processes, products, services, channels), in order to make
the types of decisions that lead to a financially successful future.

It will be apparent that the key differentiator between cost accounting and the other two uses of
the “Cost Mea- surement” box is that cost accounting is deeply con- strained by regulatory
practices and by describing the past in accordance with principles of financial account- ing. The
other two categories offer diagnostic support to interpret and draw inferences from what has
already taken place and what can happen in the future. Cost reporting and analysis is about
explanation. Decision support with cost planning is about possibilities. The message at the
bottom of the figure is that the value-add, utility, and usefulness of the information increase,
arguably at an exponential rate, from the left side to the right side of the diagram.

When the cost reporting and analysis component shifts right to the decision support with cost
planning box in Figure 4, analysis shifts to the realm of decision support via economic analysis.
For example, we need to under- stand the impact that changes will have on future ex- penses, so
the focus shifts to resources and their capacities. This involves classifying the behavior of
resource expenses as sunk, fixed, step-fixed, semivariable, variable, and dis- cretionary with
changes in service offerings, volumes, mix, processes, and the like. The classification is tricky.
Here’s a key concept: The “adjustability of capacity” of any individ- ual resource expense
depends on both the planning time horizon and the ease or difficulty of adjusting the individ- ual
resource’s capacity (its “stickability”). This wanders into the messy area of marginal/incremental
cost analysis that textbooks oversimplify but that is complicated to cal- culate accurately in the
real world.

Figure 5 illustrates how a company’s view of its profit and expense structure changes as analysis
shifts from the historical cost reporting view to a predictive cost planning view. The latter is the
context from which decisions are considered and evaluated.

The resource expenses in the left-hand side of Figure 5 were incurred during the historical time
period. The capacity for which these expenses were incurred was sup- plied. Then it was either
(1) unused as idle or protective capacity or (2) the expenses were used to make products, to
deliver customer services, or to sustain the organiza- tion internally. This is the cost reporting
and analysis com- ponent from Figure 4 that calculates output costs. The money was spent, and
costing tells where it was used. This is the descriptive view of costs. Accountants refer to it as
full absorption costing when all the expenses for a past time period are traced to outputs. It traces
expenses (and, I hope, doesn’t allocate indirect expenses with causal-insensitive, broadly
averaged cost allocation factors like the number of direct labor input hours, units pro- duced,
head count, or square feet/meters) to measure which outputs uniquely consumed the resources,
includ- ing individual output costs. The full absorption costing method uses direct costing
methods and supplements the reporting with ABC techniques for the indirect and shared
expenses.
The IFRS Accounting Taxonomy improves communication between preparers and users of
financial statements that comply with IFRS Accounting Standards. Preparers can use the IFRS
Accounting Taxonomy's elements to tag required disclosures, making them more easily
accessible to users of electronic reports.

The IFRS Accounting Taxonomy reflects the presentation and disclosure requirements of IFRS
Accounting Standards and includes elements from the accompanying materials to the IFRS
Accounting Standards such as implementation guidance and illustrative examples. In addition, it
contains elements for disclosures not specifically required by IFRS Accounting Standards but
commonly reported in practice.

Updates to the IFRS Accounting Taxonomy are released when the International Accounting
Standards Board (IASB) issues new or amended Accounting Standards that affect IFRS
Accounting Taxonomy content. Updates may also be released after an analysis of disclosures
commonly reported in practice or to reflect improvements to the IFRS Accounting Taxonomy's
general content or technology. IFRS Accounting Taxonomy updates are subject to public
consultation.

The annual IFRS Accounting Taxonomy is a compilation of updates to the IFRS Accounting
Taxonomy published throughout the year. The IFRS Foundation usually publishes the annual
IFRS Accounting Taxonomy in the first quarter of each year.

The Foundation also publishes educational guides and supporting material to aid understanding
and use of the IFRS Accounting Taxonomy.

Accounting, also known as accountancy, is the measurement, processing, and communication of

financial and non-financial information about economic entities such as businesses and
corporations. Accounting, which has been called the "language of business", measures the results
of an organization's economic activities and conveys this information to a variety of
stakeholders, including investors, creditors, management, and regulators.Practitioners of
accounting are known as accountants. The terms "accounting" and "financial reporting" are often
used as synonyms.

Accounting can be divided into several fields including financial accounting, management
accounting, tax accounting and cost accounting. Financial accounting focuses on the reporting of
an organization's financial information, including the preparation of financial statements, to the
external users of the information, such as investors, regulators and suppliers. Management
accounting focuses on the measurement, analysis and reporting of information for internal use by
management. The recording of financial transactions, so that summaries of the financials may be
presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is
the most common system.Accounting information systems are designed to support accounting
functions and related activities.

Accounting has existed in various forms and levels of sophistication throughout human history.
The double-entry accounting system in use today was developed in medieval Europe,
particularly in Venice, and is usually attributed to the Italian mathematician and Franciscan friar
Luca Pacioli. Today, accounting is facilitated by accounting organizations such as standard-
setters, accounting firms and professional bodies. Financial statements are usually audited by
accounting firms, and are prepared in accordance with generally accepted accounting principles
(GAAP). GAAP is set by various standard-setting organizations such as the Financial
Accounting Standards Board (FASB) in the United States and the Financial Reporting Council
in the United Kingdom. As of 2012, "all major economies" have plans to converge towards or
adopt the International Financial Reporting Standards (IFRS).

Accounting plays a vital role in running a business because it helps you track income and
expenditures, ensure statutory compliance, and provide investors, management, and
government with quantitative financial information which can be used in making business
decisions.

There are three key financial statements generated by your records.

• The income statement provides you with information about the profit and loss
• The balance sheet gives you a clear picture on the financial position of your business on a
particular date.
• The cash flow statement is a bridge between the income statement and balance sheet and
reports the cash generated and spent during a specific period of time.
It is critical you keep your financial records clean and up to date if you want to keep your
business afloat.