MODULE 1

INTRODUCTION
LEARNING OBJECTIVES
When student have completed the module, students should understand the
definition of accounting, users of accounting information, and understand
accounting principles.

LEARNING DESCRIPTIONS
This module presents and an overview of the definition of accounting, the
usefulness of accounting, the accounting profession, the accounting fields, the
accounting process, the forms of corporate organization, the types of business
enterprises, and accounting principles.

A. Definition of Accounting
Despite the fact that many practitioners describe accounting as an arts and not
a science, there seems to be little consensus on an accurate definition of the term.
Many dictionaries do not provide a direct definition but define the term 'accountant'
as one liable to render account, or a professional keeper and inspector of accounts.
Using the latter as a starting point, it is probably easier to describe accounting as a
process rather than providing precise definition. Hence, accounting could be
described as the process of: recording information, classifying information, and
summarizing and communicating information. The information referred to above is
that which is extracted from financial transactions: that is transactions that are
measurable in money term.
Accounting is often called the “language of business”. A language is a means
of social communication and involves a flow of information from one person to one
or more other persons. As you study accounting, you must learn the meanings of
the words and symbols used by accountants if you want to understand the messages
contained in financial summaries and reports. The importance of understanding
accounting information is not restricted to those engaged directly in business.
Accounting plays a significant role in society and, in a broad sense, everyone is
affected by accounting information.

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 Experts define accounting as not the same or different, but in principle it
means the same, therefore the definition of accounting which is general and easy to
understand is the definition of the American Institute of certified Public
Accountants (AICPA). Accounting is an activity or process of recording,
classifying, summarizing financial transactions and reporting, and interpreting the
results. In principle, accounting is the science and art of recording, classifying,
summarizing, and reporting financial transactions of an organization in certain
systematic ways, as well as interpretations of the results.
Thus, accounting involves the recording, classification, and summarisation
of financial information to enable good decision to be made. Accounting
information is financial data about business transaction expressed in terms of
money. Transaction are the economis activities of a business and accountants
classify these transaction into two types, external and internal. External transactions
are those that involve economic events between one firm and another independent
firm. Whereas, internal transactions are those economic event that take place
entirely within one firm.

B. Users and Information Needs

The parties that need accounting information consist of internal parties and
external parties. The parties include:
(1) Investors,
(2) Employees,
(3) Owners,
(4) Creditors,
(5) Customers,
(6) Governments and Their Agencies,
(7) Public
In figure I.1 it presents a link between users and accounting information.

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 Transactions

Managerial Tax return

Management Reports

Government
Accounting
Information
System

Financial
statement

Govermment
Management

Employees
Customers
Investorss

Figure I.1 Accounting reports and users Publics

C. Professionals and Fields of Accounting.

In general, the accounting profession is divided into several fields, namely:
Public Accountant, Internal Accountant, Government Accountant, Financial
accountant, Cost accountant, Management accountant, Tax accountant, and
Educational Accountant. While the field of accounting expertise such as; (1) public
accounting, (2) accounting taxation, (3) cost accounting, (4) budgeting, (5) auditing,
(6) financial accounting, and (7) management accounting.

D. Accounting Process and Cycle

Financial statements are the results of the process of accounting activities for
one period. In the accounting definition above mentioned that accounting is a

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process that includes; (1) Recording, (2) Classifying, (3) Summarizing, (4)
Reporting, and (5) Interpreting.
Activities of recording, classifying, and summarizing are processes that are
carried out routinely and repeatedly. While reporting and interpretation activities
are usually only carried out at certain times.
Routine recording and classification activities can be done by handwriting
found in small companies, and some are done with automatic machines as we find
in large companies.
As stated earlier, the accounting process consists of several stages starting
from recording to reporting. The accounting process starts from receiving and
preparing documents, recording transactions in journals, transferring accounting
records to ledgers, compiling trial balance, to preparing financial statements.
At the end of the accounting period, closing stages are carried out by making
a closing journal, then the accounting process takes place again in the next period
by beginning to make reversing entries. The repeated accounting process as above
is called the accounting cycle.

E. Form of Business Organisation

Business entities are classified based on several aspects, two of which are
based on aspects of ownership and aspects of their activities. In terms of ownership
aspects, companies can be classified into: a single proprietorship/sole trader, a
partnerships, a company/corporation, and co-operative. A single proprietorship/sole
trader is a business owned by one person. A partnerships is a business owned by
two or more people acting as partners. A corporation is a legal entity that is separate
and distinct from its owners. Its owners are called shareholder because their
ownership interests are represented by shares in the company's capital. Co-
operatives are becoming a popular means of incorporation where members are able
to take advantage of trading between themselves.
Judging from the aspects of its activities, companies can be classified into:
service companies, trading companies, and manufacturing companies. Service
companies, namely companies engaged in offering services for profit. This activity
involves the supply of a service of some sort; for example, a dentist, doctor,

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plumber, accountant, workshop and repair, salon, cinema, travel agency, consultant,
and many other examples. Trading company, which is a company engaged in
buying merchandise and reselling these items for profit. Good are bought (usually
from manufactures) and sold to another business organisations (usually retailer)
who will in turn sell to the public, like, building material stores, department stores,
supermarkets and many other examples. Manufacturing companies, namely
companies engaged in processing raw materials into finished goods and then selling
them for profit. Manufacturing involves the production of goods for example
manufacturers steel, furniture companies, textile companies, cement companies,
brick companies, and many other examples.

F. Accounting Principle
Economic information that will be conveyed to interested parties must be
presented and reported objectively. For this purpose, accounting standards or
guidelines are needed. The accounting standards that apply in Indonesia are
prepared by the Indonesian Institute of Accountants called financial accounting
standards. The standard consists of several statements called Statement of Financial
Accounting Standards. The Statement of Financial Accounting Standards consists
of several rules and as a guideline in carrying out accounting functions in Indonesia,
so that the financial statements produced are generally accepted.

G. Assumptions, Principles, and Constraints

The basic assumptions underlying the financial accounting structure are; (1)
Economic entity assumption, (2) Going concern assumption, (3) Monetary unit
assumption, and (4) periodicity. The basic accounting principles used to record
transactions include: (1) historical costs, (2) revenue recognition, (3) matching, and
(4) full disclosure. Constraints that must be considered in providing information
with qualitative characteristics that make it useful include: (1) cost-benefit
relationships, and (2) timeliness.
The economic entity assumption assumes that a company as a stand-alone
business unit that is separate from its owner and creditor. Therefore, the company's
financial transactions are separated from the financial transactions of the owners
and creditors of the company. This concept needs to be well understood,

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considering that most of the financial accounting material that will be discussed
further bases on this assumption.

Owners
Firm separated &
Creditor
ss

Going concern assumption, is an assumption that an enterprise is a going

concern and will continue in operation foreseeable future. Hence, it is assumed that
the enterprise has neither the intention nor the need to liquidate or curtail materially
the scale of its operation; if such an intention or need exists, the financial statements
may have to be prepared on a different basis and, if so, the basis used is disclosed.

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