Nature and purpose of accounting

Nature and purpose of accounting - Transcript

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The Nature and Purpose of Accounting

What Accounting Does
Accounting is a system that provides information on
Amounts of resources How resources were financed Results achieved by using resources

For either
Parties inside or outside of organization Profit and nonprofit organizations

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Categories of Accounting Information
Operating Financial accounting Management accounting Tax accounting

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Operating Information
Needed to conduct day to day activities Largest quantity of accounting data Examples
Hours worked by employees for payroll purposes Automobiles available for sale to customers Amounts owed by customers Parts and accessories on hand

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Financial Accounting Information
For external users investors and managers Used by investors to make decisions to buy sell or hold shares of company Primary financial statements
Balance sheet Income statement Statement of cash flows

Common rules used so investors can compare with other companies financial statements

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Management Accounting Information
For internal users such as president marketing manager and production manager Used for three functions of managers
Planning Implementation Control

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Planning
Deciding what actions should be taken Decision making involves
Identify problem or opportunity Specify and rank criteria Identify alternatives Use accounting and other information to analyze Compare alternatives and select best

Budgeting process of planning for a specified time often for one year
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Implementation
Actions to provide human and other resources to achieve planned results Requires supervision of managers Managers must change plans as conditions require

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Control
Process to ensure employees perform properly Accounting information is used to
Communicate Inform employees of plans Motivate Encourage employees to act consistently with organization s goals Direct attention Provide feedback that is signal when a problem may exist Appraise Provide information to appraise performance of managers and other employees

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Tax Accounting Information
Preparation of federal state and other taxes Tax accounting rules can differ from financial accounting rules

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Definition of Accounting
Process of
Identifying Measuring Communicating

Economic information To make decisions

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Accountants in Organizations
Bookkeepers and other data entry personnel
Maintain detailed operating records

Staff accountants
Prepare and interpret reports Design and operate information systems Ensure accuracy of information

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Responsibilities of Controller
Manage professionals prepare reports
Management accounting Financial accounting Tax accounting

Design installation and operation of information systems

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Approaches to Study Accounting
Viewpoint of accountant preparer
Collecting summarizing and reporting accounting information

Viewpoint of user
Understanding analyzing and interpreting accounting reports to make decisions

We emphasize perspective of current and potential future users recognizing need for some knowledge of how accounting reports are prepared
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Misconceptions about Accounting

That It is to measure the resources of business

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Misconceptions about Accounting
That It is to measure the resources of business

Not all resources of organizations can be measured and reported
Knowledge and skills of employees

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Misconceptions about Accounting
1 That It is to measure the resources of business 2 That it is to see net worth of the business

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Misconceptions about Accounting
That It is to measure the resources of business Not all resources of organizations can be measured and reported
Knowledge and skills of employees

That it is to see net worth of the business Actual value or worth of a business may not be included in usual financial reports
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Accounting Principles
General rule or law Convention Evolutionary Criteria
Relevance Useful and meaningful Objectivity Reliable unbiased and verifiable Feasibility Implemented without undue cost

Trade off among criteria
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Financial Statements Required by GAAP
Statement of Financial Position Balance Sheet Income Statement Statement of Cash Flows

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Stock vs Flow
Stock resources and obligations at a point in time
Balance sheet

Flow activity over a period of time
Income statement Statement of cash flows

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Dual Aspect Balance Sheet Fundamental Accounting Equation
Assets Liabilities Owners equity
LHS RHS Resources Obligations to creditors or claims on resources Residual claim Amounts invested in resources how these amounts were financed Resources financed by creditors financed by owners

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Owners Equity
Equivalently net assets i e A L Sources of OE
Amounts provided directly by equity investors Paid in capital Amounts retained from earnings i e profits Retained Earnings

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Fundamental Accounting Equation
Assets Liabilities Owners Equity Net Assets Owners Equity Every accounting transaction has an equal affect on both sides of equation Purchase a 20 000 car for cash
Increase asset car and decrease asset cash by 20 000 No net change to assets

Purchase a 20 000 car on credit
Increase asset car and increase liabilities by 20 000

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Income Statement
Shows changes in Owners Equity or Retained Earnings from operations of business Reconciles Retained Earnings from beginning to end of period resulting from operations of business Revenues Expenses Net Income
Sales Revenue amount for product sold to customers during accounting period Gross margin Sales revenue Cost of sales
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Financial Statement Objectives
Useful for investment decisions All financial statements Comprehensible All financial statements About economic resources and claims on resources Balance Sheet About financial performance during a period Income Statement About cash flows Statement of Cash Flows

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