Accounting 1

Mrs. Eddy

Introducing Accounting

Why Do We Need Accounting?• Asking that question of an accountant is like asking a

farmer why we need rain.  We need accounting because it’s the only way for business to grow and flourish.  Accounting is the backbone of the business financial world.   After all, accounting was created in response to the development of trade and commerce during the medieval times.

History• Italy is our first recorded source for accounting entries,

and the first published accounting work in 1494 was by a Venetian monk.  So you see accounting as an organized method for record-keeping has been around almost as long as the trade and business industries.  Another interesting fact is the knowledge and principles upon which the first accounting practices were established, have changed very little in the many hundreds of years that accounting has been in use.  The concepts of assets, liabilities, and income and the need to reconcile these areas is still the basis for all accounting functions today.

Evolution• The process for recording those transactions, and the

many reports generated by the compilation of that information has evolved over the last two hundred years.  Thanks to the creation of computers, many of the bookkeeping functions that are vital to accounting, but somewhat repetitive are performed by data entry clerks, and the reports generated come from the IS Department.  The end result is still the same: accounting gives us the financial snapshot we need in order to make solid business decisions about the current status or projected future health of our businesses.

Categories• There are two basic categories of accounting:

financial accounting and managerial accounting.  Financial accounting is comprised of information that companies make available to the general public:  stockholders, creditors, customers, suppliers, and regulatory commissions.  Managerial accounting deals with information that is not made public.  Information such as salary costs, Cost of goods produced, profit targets, and material control information.  The knowledge supplied by managerial accounting is for the use of department heads, division managers, and supervisors to help them make better decisions about the day-to-day operations of the business

Accountability• Now, what about the “accountability” part of the

accounting process?  Why do we need that and how do we enforce it?  Businesses need to be held accountable for the methods they use to run a business because the potential for greed, theft, and dishonesty exist in every business.  You have only to read the current events section of the newspaper to realize how rampant corporate abuse is in business today.  We have Enron, HEALTHSOUTH, and Martha Stewart examples to show us just how extensive the problem has become.  There are specialized areas of accounting, that when correctly enforced, eliminate the possibility for fraud.  Auditing and income taxation, when used correctly, force business to account for all business income, transactions, and transfers, and then to pay their fair share of the tax burden.  The catch here is that the principles must be correctly enforced.

Conscience• Accounting is the conscience of the business world. 

When handled with care and with respect, it performs as expected.  When abuse occurs, and the system is circumvented or overridden because of dishonesty and greed, it doesn’t work correctly. Accounting is much like all other systems in place, they are only as good as the people using them.

What is Accounting?• Topic:

• Introduction to Accounting

 Concept:

Understand the purpose of accounting records both within organizations and for use by outside parties.

 Objectives:• Students will understand the importance of the accounting

language. • Students will understand the three main types of accounting

information. • Students will be introduced to the “principles” of accounting and

GAAP. • Students will be introduced to the three types of accounting

reports required by GAAP

What is Accounting?• Quite simply, accounting is a language: a language that

provides information about the financial position of an organization. When you study accounting you are essentially learning this specialized language. By learning this language you can communicate and understand the financial operations of any and all types of organizations.

• This is because the information required by most organizations is very similar and can be broken down into three main categories:

What is Accounting?• Operating Information

• This is the information that is needed on a day-to-day basis in order for the organization to conduct its business. Employees need to get paid, sales need to be tracked, the amounts owed to other organizations or individuals need to be tracked, the amount of money the organization has needs to be monitored, the amounts that customers owe the organization need to be checked, any inventory needs to be accounted for: the list goes on and on. Operating information is what constitutes the greatest amount of accounting information and it provides the basis for the other two types of accounting information.

What is Accounting?• Financial Accounting Information

• This is the information that is used by managers, shareholders, banks, creditors, the government, the public, etc… to make decisions involving the organization and its operations. Shareholders want information about what their investment is worth and whether they should buy or sell shares, bankers and other creditors want to know whether the organization has an ability to pay back money lent, managers want to know how the company is doing compared to other companies. This type of information would be very difficult to extract if every company used a different system for recording their financial position. Financial accounting information is subject to a set of ground rules that dictate how the information is reported and this ensures uniformity.

What is Accounting?• Managerial Accounting Information

• In order for the managers of a company to make the best decisions for a company they need to have specific information prepared. They use this information for three main management functions: planning, implementation and control.

• Financial information is used to set budgets, analyze different options on a cost basis, modify plans as the need arises, and control and monitor the work that is being done.

What is Accounting?• As you can see, accounting is a multifaceted system

involving different people with different needs and after analyzing the various uses and applications of accounting information the American Accounting Association has come up with this definition: “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.”

What is Accounting?• In order to facilitate the informed use of this financial

information, accounting has come to be based on specified rules or conventions called “principles.” These principles provide general laws or rules that are used to guide accounting activity and are called Generally Accepted Accounting Principles, or GAAP for short. These principles are established by the Financial Accounting Standards Board (FASB) which is a nongovernmental agency funded by the accounting profession and contributions from business organizations. While there is no legal obligation for companies to adhere to GAAP, there are strong practical reasons to do so. From auditing to reporting earning to the US Securities Exchange Commission to applying for a loan, there are very compelling reasons for organizations to conform to the generally accepted standard.

What Is The End Result Of All This Accounting Information?• We’ve talked about the reason for maintaining accounting

information and the end result of all of this recording is the preparation of financial statements. These statements let people see, at a glance, the financial position of an organization. These statements provide summaries of the operating information and are used extensively by people within and external to the company. The statements fall into one of two categories:

• Status/Stock – these statements show the financial status of an organization at one specified instant in time. Stock reports = a snapshot.

• Flow Report – these statements show the flow of financial information over a period of time. Flow reports = motion picture

• GAAP requires the preparation of three different statements:

Balance Sheet• A Balance Sheet is a status report that shows

information about the organization’s resources at one given time. Examples of information found on a balance sheet are how much cash is in the bank, what is owed to creditors, and the value of the company’s assets.

Income Statement• An Income Statement (also called a Statement of

Earnings, Statement of Operations, or a Profit and Loss Statement) is a report that shows the flow of revenues (amounts earned from business activity) and expenses (amounts paid in the course of operations) over a given period of time, typically a month, quarter, or year.

Statement of Cash Flow• As the name suggests, this is also a flow statement that

details the movement of cash through the organization over a specified period.

What is Accounting?• The whole purpose of accounting is to provide

information that is useful and relevant for interested parities when making decisions regarding the company and its operations. In order to do that effectively, a specific language and subsequent rules have been developed for users of the information. By learning accounting you learn these rules and can then communicate financial information with others in a comprehensible and comparable manner.