Scribd
Upload
67 views6 pages

Unit 1: Accounting and The Business Environment What Is Accounting?

Accounting measures and reports on a business's financial activities and transactions. It identifies, records, and communicates key economic information to stakeholders. There are two main fields - managerial accounting for internal use, and financial accounting for external reporting. Financial statements like the income statement, balance sheet, and statement of cash flows are prepared according to accounting principles and concepts to communicate useful financial information to users such as investors, creditors, and tax authorities for decision making. The International Accounting Standards Board establishes international standards for accounting practice.

Uploaded by

sherese
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
67 views6 pages

Unit 1: Accounting and The Business Environment What Is Accounting?

Accounting measures and reports on a business's financial activities and transactions. It identifies, records, and communicates key economic information to stakeholders. There are two main fields - managerial accounting for internal use, and financial accounting for external reporting. Financial statements like the income statement, balance sheet, and statement of cash flows are prepared according to accounting principles and concepts to communicate useful financial information to users such as investors, creditors, and tax authorities for decision making. The International Accounting Standards Board establishes international standards for accounting practice.

Uploaded by

sherese
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 6

UNIT 1: ACCOUNTING AND THE BUSINESS ENVIRONMENT

What is ACCOUNTING?
“Accounting is the information system that measures business
activity, processes the data into reports, and communicates the
results to decision makers”. (Horngren et al, 2012, p.2).

Accounting is “the information system that identifies, records, and


communicates the economic events of an organization to interested
users”. (Weygandt et al, 2003, p.2)

In simpler terms, accounting tells us what amounts of money are,


what the money will be used for (usually transactions of buying and
selling) and then we present all this information in a way that
would make sense for decision making.

Some objectives of Accounting include informing persons or


organizations know:
 If they are generating profit or loss
 The worth of their business
 What a transaction is worth to the business
 How much cash does the business have
 How much is the organization owed
 How much is owed to the organization

The system is as follows:


 Identification – select economic events or identify transactions.
 Recording – after the transactions have been identified, they
are recorded in chronological order and measured in dollars
and cents.
 Communication – accounting reports are prepared after
transactions have been recorded. These reports are
communicated to interested users of financial information.

There are 2 fields of accounting:


1. Managerial Accounting
2. Financial Accounting
UNIT 1: ACCOUNTING AND THE BUSINESS ENVIRONMENT

The Need for Financial Statements


How do we communicate accounting? We use Financial Statements to “report
on a business in monetary terms”. (Horngren et al, 2012) Financial Statements
contain financial information which is considered the language of business.

Users of Financial Statements


Since Financial Statements provide a report on the activities of a business in
monetary terms, we can agree that there would be several persons interested in
this information. Financial information is used to make several decisions so
there are several different groups of individuals that would be interested in
financial information. Can you think of some users?

1. Individuals – Individuals use data represented on Financial Statements


to help with decision making on a personal level. For example,
evaluating a new job, deciding where you can afford to purchase a new
electronic, deciding an amount to save monthly towards a specific goal.

2. Businesses – Businesses usually need to make similar decisions as


individuals and use accounting information for assistance and guidance.
They use accounting information to measure progress through
comparison (by period or with other similar businesses), set goals and to
make adjustments to existing practices.

3. Investors – Investors are the persons who are not owners but have an
interest in the company; usually to purchase shares. Think for example,
if you are interested in purchasing shares in a company, won’t you want
to know whether you are making a good investment? This is where
information from Financial Statement comes in. Understanding financial
statements can also be beneficial after the investment is made to monitor
and analyze the performance of the investment.

4. Creditors are the persons whom the business owes money. Before the
business can obtain money, there are lending criteria that must be met.
The lender or lending institution (such as a bank) would want to be
UNIT 1: ACCOUNTING AND THE BUSINESS ENVIRONMENT

satisfied that the entity will be able to make its loan payments. To earn
this satisfaction, the creditor will review the financial statements.
Your financial statement tells your creditors about your ability to meet
financial obligations and whether you are a high risk or low risk to the
lending institution.

5. Tax Authority – if you operate a business you are liable to the state and
government for taxes. In the Caribbean, our governing tax bodies are
usually referred to as “Inland Revenue Department”.
Each of the above-mentioned users would review financial statement for
different reasons. Each of them may find different components of the Financial
Statements useful.

Characteristics of Financial Information


Financial information must be useful for the purpose of decision making. To
be useful, this information needs to confirm to certain characteristics or
features.
Comparability
Reliability
Relevance
Understandability

The Accounting Profession and the Organizations that govern it


All businesses need Accountants.
What is CPA – Certified Public Accountant – CPAs are licensed professional
accountants who generally work for the public.
What is CMA – Certified Management Accountant – CMAs are certified
professionals but usually work for a single company.
Generally Accepted Accounting Principles (GAAP) are the set of
standards developed by the accounting profession as generally accepted and
universally practiced.
In the United States of America Accounting standards are formulated by the
Financial Accounting Standards Board (FASB).
UNIT 1: ACCOUNTING AND THE BUSINESS ENVIRONMENT

The Securities and Exchange Commission (SEC) is one other body that is
involved in establishing the generally accepted accounting principles.

Ethics in Accounting and Business


Per the Oxford dictionary, Ethics describes a set of moral principles that govern
behavior or the conducting of an activity.

“The standards of conduct by which one’s actions are judged as right or wrong,
honest or dishonest, fair or not fair, are ethics” (Weygandt et al, 2003).

If an entity cannot depend on the honesty of the individuals it deals with, then
the information produced by these will have no credibility. Financial
statements are required to provide reliable information. The Securities and
Exchange Commission (SEC) requires companies to make available audited
financial statements to eliminate any conflict of interest. Independent
accountants are employed to issue an opinion that confirms whether the
financial statements give a fair picture of the company’s financial position or
not.

Types of business organizations


Organizations are generally classified as:
(1) Proprietorship
(2) Partnership
(3) Corporation
(4) Limited Liability
(5) Not-for-profit.

How do we know which type of business it is? Businesses are usually


classified based on ownership.
UNIT 1: ACCOUNTING AND THE BUSINESS ENVIRONMENT

The table below identifies the main characteristics of the different forms of
businesses.

Proprietorship
A proprietorship is a business owned by one person.

Its owner is often the manager and/or operator of the business.

Usually business on a small scale – barber shops, clothing stores, small


retail shops.

Start-up capital is usually a small amount.

All profits go directly to the owner. All losses are suffered by the owner.

The owner is personally liable for any debts of the business.

Accounting records of the business are separate from that of the owner.

Accounting Concepts and Principles


The main purpose of financial reporting is to provide information that users
can use to make investment and lending decisions. For the information to be
useful it must be: relevant (good for its intended purpose), reliable (credit
worthy) and comparable (able to compare with firms in similar operations).
The application of Accounting Concepts and Principles form part of the
function for financial reporting.
UNIT 1: ACCOUNTING AND THE BUSINESS ENVIRONMENT

Entity Concept – the owner and the organization unit are considered as
separate.
Faithful Representation Principle – accounting information is reliant on the
fact that the data is a faithful representation of the measurement or
description of that data.
Cost Principle – states that the acquisition of assets and services must be
recorded at the actual cost. That is, the amount recorded should be the
actual amount paid for the asset or service. There is no regard for bargain.
Cost is considered a reliable measure.
Going-Concern Concept – assumes that the business will remain in
operational long enough to use existing assets for their intended purpose.

The Financial Statements


Income Statement
Balance Sheet
Statement of retained earnings/ Statement of Owner’s Equity
Statement of Cash Flows

International Accounting Standards Board (IASB)


 is the organization that determines how accounting is practiced
international.

International Financial Reporting Standards (IFRS)


 Provides guideless as are formulated by the International Accounting
Standards Board (IASB) which detail how accountants measure, process
and communicate financial information.

References
Horngren, C., Harrison, W., and Oliver, S. (eds) Accounting. 3rd Edition. NJ:
Prentice Hall.

Weygandt, J., Kieso, D., and Kimmel, P. (eds). Financial Accounting. (2003) 4th
Edition. USA: John Wiley & Sons

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy