Accounting - Chapter 1

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Chapter 1: The Accounting Environment – What is Accounting and Why is it Done?

Accounting is a system for gathering data about an entity’s economic activity, processing and organizing the data and in turn, communicating that information to people who want to use it to make decisions.

Data are unprocessed facts about an entity’s economic activity that is entered into an accounting system whereas information results from organizing and presenting the data in ways that make it useful for decision making by stakeholders.

Financial Accounting provides information to people who are external (investors, lenders, taxation authorities (CRA), competitors) to an entity.

Managerial Accounting provides information to internal users (managers) of an entity for decision making. It assists in operating decisions such as price setting, expansion, evaluating which products are successful and which aren’t, and determine the amount of a product that should be produced.

Accounting matters because it has economic consequences (choosing certain accounting method can result in gaining more money or losing more money – which one do you choose).

People need good accounting information to make good decisions about a business strategy.

Cost benefit trade-off is the concept of comparing the benefits of an action with its costs and of taking the action only if the benefit from it exceeds the cost of it. More information leads to better decisions, however, there are limits. Gathering and processing data is costly and time consuming. At some point, the benefit isn’t worth the cost. Too much information can impair a person’s ability to make decisions.

There are four key components of the accounting environment (accounting should be responsive to the environment and the people using the information): overall environment, entities, stakeholders and constraints.

Environment
 Political, cultural, economic, competitive, regulatory and legal parameters differ from country to

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