Accounting is an information and measurement system that identifies, records, and communicates relevant information to help people make better decisions.
Recordkeeping, also called bookkeeping, is the recording of financial transactions and events, either manually or electronically. Recordkeeping is essential to data reliability; but accounting is this and much more. Accounting includes identifying, measuring, recording, reporting, and analyzing business events and transactions.
Technology offers increased accuracy, speed, efficiency, and convenience in accounting.
External users of accounting include lenders, shareholders, directors, customers, suppliers, regulators, lawyers, brokers, and the press. Internal users of accounting include managers, officers, and other internal decision makers involved with strategic and operating decisions.
Internal users (managers) include those from research and development, purchasing, human resources, production, distribution, marketing, and servicing.
Internal controls are procedures set up to protect assets, ensure reliable accounting reports, promote efficiency, and encourage adherence to company policies. Internal controls are crucial for relevant and reliable information.
Ethical guidelines are threefold: (1) identify ethical concerns using personal ethics, (2) analyze options considering all good and bad consequences, and (3) make ethical decisions after weighing all consequences.
Ethics and social responsibility yield good behavior, and they often result in higher income and a better working environment.
For accounting to provide useful information for decisions, it must be trusted. Trust requires ethics in accounting.
Two major participants in setting rules include the SEC and the FASB. (Note: Accounting rules reflect society’s needs, not those of accountants or any other single constituency).
Most U.S. companies are not directly affected by international accounting standards. International standards are put forth as preferred accounting practices. However, stock exchanges and other parties are increasing the pressure to narrow differences in worldwide accounting practices. International accounting standards are playing an important role in that process.
The objectivity and cost principles are related in that most users consider information based on cost as objective. Information prepared using both principles is considered highly reliable and often relevant.
Users desire information about the performance of a specific entity. If information is mixed between two or more entities, its usefulness decreases.
The revenue recognition principle gives preparers guidelines on when to recognize (record) revenue. This is important; for example, if revenue is recognized too early, the statements report revenue sooner than it should and the business looks more profitable than it is. The reverse is also true.
The three basic forms of business organization are sole proprietorships, partnerships, and corporations.
Owners of corporations are called shareholders (or stockholders). Corporate ownership is divided into units called shares (or stockEquity of a corporation divided into ownership units; also called stock.). The most basic of corporate shares is common stock (or capital stock).
The accounting equation is: Assets = Liabilities + Equity. This equation is always in balance, both before and after each transaction.
A transaction that changes the makeup of assets would not affect liability and equity accounts. FastForward’s transactions 2 and 3 are examples. Each exchanges one asset for another.
Earning revenue by performing services, as in FastForward’s trans action 5, increases equity (and assets). Incurring expenses while servicing clients, such as in transactions 6 and 7, decreases equity (and assets). Other examples include owner investments (stock issuances) that increase equity and dividends that decrease equity.
Paying a liability with an asset reduces both asset and liability totals. One example is FastForward’s transaction 10 that reduces a payable by paying cash.
An income statement reports a company’s revenues and expenses along with the resulting net income or loss. A statement of retained earnings shows changes in retained earnings, including that from net income or loss. Both statements report transactions occurring over a period of time.
The balance sheet describes a company’s financial position (assets, liabilities, and equity) at a point in time. The retained earnings amount in the balance sheet is obtained from the statement of retained earnings.
Cash flows from operating activities report cash receipts and payments from the primary business the company engages in. Cash flows from investing activities involve cash transactions from buying and selling long-term assets. Cash flows from financing activities include long-term cash borrowings and repayments to lenders and the cash investments from and dividends to the stockholders.
