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General View of Accounting

CHAPTER 1CHAPTER 1

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Introduction of accounting

* Second oldest profession

* Participated in the development of

nations, trade, finance, money and banking

* Double-entry bookkeeping fueled the Renaissance

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Introduction of accounting

Luca Pacioli (1445-1517)

Summa di Arithmetica

treatise on book-keeping

People have understood accounting on a scientific principle in Italy

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Introduction of accounting

John Gouge, 1543

The first known English book on accounting

A Profitable Treatyce called the Instrument or Boke to learn to know the good order of the kepying of the famouse reconynge, called in Latyn, Dare and Habdare, and, in Englysh Debitor and Creditor.

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Introduction of accounting

The first public recognition of accountants

A Bankruptcy Act

In 1831

It mentions accountants alongside merchants and bankers as properly skilled to conduct audits.

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Introduction of accounting

Management accounting

World War One (1914-1918)

Accountants assist in the control of costs in relation to the production of ammunitions: bullets, bombs, explosives, etc.

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Introduction of accounting

After the Second World War

Development of accounting

Enron financial scandal

In August 2002, the Sarbanes-Oxley Act is passed in the United States.

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Accounting Definition

Accounting ≠ Bookkeeping

It is the means of recording transactions and keeping records.

Accounting

Bookkeeping

Bookkeeping is the day-to-day record-keeping involved in the process of accounting.

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Accounting Definition

Accounting Accurate financial reports

Useful to managers, regulators, and shareholders, creditors or owners

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Accounting Definition

Major goal of accounting

Analysis

Interpretation

Use of information

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Accounting Definition

The American Institute of Certified Public Accountants

“The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.”

(AICPA)

Early definitions of accounting focused on the traditional record-keeping functions of the accountant.

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Accounting Definition

The modern definition of accounting

It is defined as an information system that measures, processes, and communicates financial information about an identifiable economic entity.

Encyclopedia

Accounting is defined as the process of maintaining, auditing, and processing financial information for business purposes.

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Accounting Definition

The modern accountant

record-keeping

Planning and problem solvingControl and attention directing

EvaluationReview

Auditing

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Accounting Definition

Business activities

Accounting Data

Useful information

Decision maker

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The Users of Accounting Information

Users

1. those who have a direct interest in the business including management;

2. those who have indirect interest in the business.

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Users with Direct Financial Interest

Present and Potential Investors

Present and Potential Creditors

Management

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Management

Management

Management is the group in a business who has overall responsibility for operating the business and for achieving the business goals.

Owners of the business Hired managers

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Major function of accounting

To provide management with relevant and useful information

Such as: what was the company’s net income during the past year?

What products are most profitable? What is the cost of manufacturing each product?

Management

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Present and Potential Investors

They are interested in the past success of the business and its potential earnings in the future.

Operating results of business

Profit sharing policy

Make decisions

Whether to increase, or decrease investments

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Present and Potential Creditors

They are interested in whether the company will have the cash to pay the interest and repay the debt at fixed time.

Banks

Finance companies

Mortgage companiesSecurities firms

Insurance firms

SuppliersIndividuals

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Users with Indirect Financial Interest

Tax Authorities

Other Groups

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Tax Authorities

Tax authorities don’t have direct financial interest in the company, but they usually analyze the tax status undertaken by a business to establish tax policy.

Governments

Income taxesSocial securityPayroll taxesExcised taxes Sales taxes

Each tax requires special tax returns and often a complex set of records as well.

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Other Groups

They advise investors and creditors and have an Indirect interest in the financial performance of a business.

Financial analysts and advisers

brokers lawyers economists

the financial press

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Other Groups

Customers The general public

They are concerned about the operating results, the effects that corporations have on inflation, the environment, social problems, and the quality of life.

Other Group

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Accounting Profession

Public Accounting

Government Accounting

Internal Auditing

Management Accounting

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Public Accountants

Certified Public

Accountants

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The Work of Public Accountants

Work for their own compay

Work for other accouting companies

provide accounting services to

individuals, businesses, and

governments

Concentrate on tax matters

Specialize in forensic accounting

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Government Accountants

work for the local or state level

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The Work of Government Accountants

Keep and examine the records of government units

administer and formulate budgets, to track costs and to analyze programs

They must follow special procedures and regulations and reports for government officials

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Management Accountants

work in companies

and help the Management

make decisions

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Work of Management Accoutants

Provide the management advice about capital budgeting and business analysis

Record and analyze the financial accounting information, market share, competition, and expansion opportunities of the company

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Internal Auditors

check accounting ledgers and financial

statements within companies

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Work of Internal Auditors Take training to keep skills up to date. Create and develop auditing systems for

companies or agencies. Conduct research to learn auditing

needs for companies or individuals. Determine and record the value of real

property. Analyze the financial data and records

to ensure that they comply with legal and financial standards.

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