What Is Accouting

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Chapter 1

What is accounting?

• Transaction: Business Activities
• Accounting: Accounting is the language of business, is the process of identifying, measuring, and communicating financial business information to various users, usually people who need it to make decisions. Accounting is one of the most important sources of information for people and who whish to invest in businesses. • For profit firm: is a firm that creates or adds value to earn money for its owners. • No-for-profit firm: is a firm that provides good or services for the sole purpose of helping people instead of making a profit. Not-for-profit organizations make money what is different is that a not-for-profit organization uses any profit to provide more goods and services to the people it serves rather than distributing profits to its owners.

Accounting information needed to operate a firm

• Profit: the difference between the revenue and the cost of selling those products or providing those services. • Revenue: The amount a business earns for the products it sells or the services it provides

When a firm evaluates new project, it will estimate the amount of revenue it plans to earn and the cost of earning that revenue. The firm wants to be sure the project will generate profit.

Using financial reports to make decisions

• Operating cycle: Is the sequence of business activities of getting cash, using cash to purchase inputs, changing those inputs into products or services, providing the product or services to customers, and eventually getting cash back.

After a firm completes one operating cycle, it has more decisions to make: Should it make more products and go through the operating cycle again? If so, should it buy more components than it bought the first time and from the same supplier? Accountants at the company can help managers answer these questions by providing the following information:

• The revenue from sales during the accounting period. An accounting period is any length of time that a company uses to evaluate its performance. It can be a month, a quarter (3 months), or a year • The cost the company incurred so those sales could be made • The components the company has left at the end of the period

Internal and external financial statement users

Accounting information is used by people both internal and external to the company. The most prominent internal users of accounting information are the managers. Managers plan, implement, and evaluate the operation of the firm. To perform these functions effectively, managers must have information about what the firm has done, what it is currently doing, and what it should be doing.

• Management accounting is the area of accounting that is specifically concerned with internal information and is not governed by any common standards or regulations for reporting. • Financial accounting: is the area of accounting that is specifically concerned with communicating accounting information to external users. A firm provides this information in the from of financial statements • Financial statements are reports about the financial condition and performance of the firm. Specific standards and guidelines govern the preparation of financial statements.

The following external users need information about a firm:

• Government: A state’s department of revenue needs information to calculate the sales tax due from the company. • Creditors: banks, and other institutions, lend money to firms. A bank requires information about a company’s financial performance to determine whether or not the company will be able to repay the loan • Potential Investors: People who want to invest in the business in return for a portion of the ownership in the company. • Vendor customers and employees: these group need useful information about the company’s financial conditions to decide whether to work for, or do business with, the...
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