EXTERNAL FUNCTIONS OF ACCOUNTING BASIC INFORMATION AND TUTORIALS

Accountants have two primary external reporting responsibilities: the preparation of tax returns and external financial reports. Exceedingly complex and constantly changing laws, rules, and forms govern state and federal income taxes, payroll taxes, property taxes, and sales taxes.

Accountants have their hands full just keeping up with tax regulations and forms. Accountants also have to stay abreast of changing accounting standards to prepare external financial reports.


The financial statements of a business that are the core of the external financial reports sent to its share owners and lenders must conform with generally accepted accounting principles (GAAP). These are the authoritative guidelines, rules, and standards that govern external financial reporting to the outside investors and creditors of a business.

The main purpose of having financial statements audited by an independent CPA firm is to test whether the  statements have been prepared according to GAAP. If there are material departures from these ground rules of financial statement accounting and disclosure, the CPA auditor says so in the audit opinion on the financial statements.

External financial reports include footnotes that are an integral addendum to the financial statements. Footnotes are needed because the external financial report is directed to outside investors and creditors of the business who are not directly involved in the day-to-day affairs of the business.

Managers should already know most of the information disclosed in footnotes. If managers prefer to have certain footnotes included in their internal accounting reports, the footnotes should be included—probably in much more detail and covering more sensitive matters than footnotes presented in external financial reports.

An external financial report includes three primary financial statements: One summarizes the profit-making activities of the business for the period; one summarizes the cash inflows and outflows for the same period; and one summarizes the assets of the business at the end of the period that are balanced by the claims against, and sources of, the assets.


The three primary financial statements do not come with built-in analysis. Rather, the financial statements provide an organized source of information. It’s up to the users to extract the vital signals and messages from the statements.