What Is Accounting?: Lesson 1

"When you want something, all the universe conspires in helping you achieve it.
"-- The Fifth Mountain
Lesson 1
What is Accounting?
Accounting is famously known as the "language of business". Through the financial statements, the en -pro uct reports in accounting, it elivers information to ifferent users. We can then say that accounting is a means through which information about a business entity is communicate . !et"s take a moment to illustrate that. Meet Mr. #trauss Mr. #trauss starte a printing business. $e investe %&'',''' personal money to start the company"s operations. After a month, he wants to know how much the business ma e. $e also wants to know if the money he investe is still there. Without a way of recor ing the activities of the business, we will not be able to answer his (uestions. #urely we can tell him, "Mr. #trauss, we ma e a lot this month)", but we nee proof) An he nee s the figures) We can easily answer Mr. #trauss" (uestions if we kept track of the company"s transactions. *f we use %+',''' of the %&'',''' we ha at the beginning to buy printers an pay the bills, then we" have %,',''' cash left. *f we collecte %-',''' from our customers, then we woul have %&.','''. Easy, right? /kay, that"s 0ust a tiny bit of what accounting can o. What if we have thousan s of transactions1 Also, there"s a lot more to accounting than 0ust recor ing. $ow much income i we make1 $ow much o we owe our cre itors1 *s this a goo investment1 Ask away. Accounting woul confi ently say, "*"ll have the reports prepare ." How cool is that?
Accounting Definition
Technical efinitions of accounting have been publishe by ifferent accounting bo ies. The American *nstitute of 2ertifie 3ublic Accountants 4A*23A5 efines accounting as6 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 financial character, and interpreting the results thereof.
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"When you want something, all the universe conspires in helping you achieve it."-- The Fifth Mountain
Though * am not a fan of technical efinitions, * believe that stu ying the statement above will give us a better un erstan ing of accounting.
1. Accounting is considered an art

Accounting is consi ere an art because it re(uires the use of skills an creative 0u gment. /ne has to be traine in this iscipline to be able to perform accounting functions well. Accounting is also consi ere a science because it is a bo y of knowle ge. $owever, accounting is not an e8act science since the rules an principles are constantly changing 4improve 5.
2. Accounting involves interconnected "phases"

Recording pertains to writing own or keeping recor s of business transactions. Classifying involves grouping similar items that have been recor e . /nce they are classifie , information is summarized into reports which we call financial statements.
3. Accounting is concerned with transactions and events having financial character

For e8ample, hiring an a itional employee is (ualitative information with no financial character. $ence, it is not recor e . $owever, the payment of salaries, ac(uisition of an office buil ing, selling goo s, etc. are recor e because they involve financial value.
4. Business transactions are e pressed in terms of money

They are assigne amounts when processe in an accounting system. 9sing one of the e8amples above, it is not enough to recor that the company pai salaries for April. *t must inclu e monetary figures -- say for e8ample, %.',''' salaries e8pense.
!. "nterpreting the results

*nterpreting results is part of the phases of accounting. *nformation is useless if they cannot be interprete an un erstoo . The amounts, figures, an other ata in the financial reports have meanings that are useful to the users. :y stu ying the efinition alone, we learne some important concepts in accounting. *t also gave us an i ea of what accountants o. ;ou may not notice but the simple things you o an encounter every ay can actually be relate to some level of accounting. ;ou make bu gets, count change an check the receipts from the supermarket. ;ou may even have liste things you spent your money with at one point in your life. We are surroun e by business -- from managing our own money to seeing profit statements of big corporations. An where there is business, there sure is accounting.
3age 2
Lesson 2
#urpose of Accounting$ "ts #ractical "%portance

*n this article you will learn the purpose of accounting an the ifferent types of financial information. We learne that accounting is the language of business, a means of communicating information about an economic entity to ifferent users for ecision-making. The illustration below shows a more etaile version of what we stu ie in the previous lesson.
An econo%ic entit& is a separately i entifiable organi<ation which makes use of resources to achieve its goals an ob0ectives. An economic entity may be a business entity operating primarily to generate profit, or a non-profit entity carrying out charitable an not-for-profit operations. This means that a "business entity or business organi<ation" refers to the for-profit type of economic entity. =onetheless, some authors use "business entity" to refer to both for-profit an not-for-profit organi<ations. The important point here, however, is that both of them rely on accounting in processing an provi ing financial information. Take a moment to stu y the illustration above.
3age 3
'he #urpose of Accounting

From the illustration presente , an for a straightforwar answer, it is clear that the ultimate purpose of accounting is to provi e information to ifferent users. The users utili<e the information in making informe economic ecisions. *t can actually be epicte from some efinitions ma e by accounting bo ies. Accor ing to he American *nstitute of 2ertifie 3ublic Accountants 4A*23A56 Accounting is a service activity !ts function is to provide "uantitative information, primarily financial in nature, about economic entities that is intended to be useful in ma#ing economic decisions, in ma#ing reasoned choices among alternative courses of action An then, we have another efinition > one which has been in use for a long time alrea y > by the American Accounting Association 4AAA5. Accounting is the process of identifying, measuring and communicating economic information to permit informed $udgment and decision by users of the information :oth of the above efinitions an the very nature of accounting suggest its basic purpose > to provi e information nee e by users in making economic ecisions.
Accounting "nfor%ation
$ere"s a list of ifferent types of information provi e by accounting reports. These things will be clearer when you get to the tutorials on Financial #tatements. For now, it is sufficient 4an goo 5 to know what information we are talking about. &. (esults of operations. This pertains to the profit generate by the company for a certain span of time 4for the year, for the (uarter, for the month, etc.5. This is measure by e ucting all e8penses from all income. The resulting amount is calle net income. .. )inancial position. $ow much resource oes the entity currently have1 $ow much oes the entity owe thir parties1 $ow much remains for the business owners after we e uct all obligations from all resources1 The first (uestion refers to the entity"s total assets? the secon to liabilities, an the thir to capital. +. *olvenc& and li+uidit&. %olvency refers to the entity"s ability to pay obligations when they become ue. &i"uidity pertains to its ability to meet short-term obligations. @. ,ash flows. The financial statements also show the inflows an outflows of cash in the ifferent activities of the business. -. -ther infor%ation. The financial statements provi e "ualitative, "uantitative, an financial information. /ne of the characteristics of the financial statements is relevance. *nformation that may potentially affect ecisions of users shoul be inclu e in the financial statements.
3age 4
Lesson 3
.sers of )inancial *tate%ents

We have been talking about accounting an its purpose of provi ing information to users for ecision-making. :ut, who e8actly are these "users of financial statements"1 Also, what information o they nee an what ecisions o they make1 The following are the ifferent users of accounting information an their specific information nee s. &. /wners an investors #tockhol ers of corporations nee financial information to help them make ecisions on what to o with their investments 4shares of stock5, i.e. hol , sell, or buy more. 3rospective investors nee information to assess the company"s potential for success an profitability. *n the same way, small business owners nee financial information to etermine if the business is profitable an whether to continue, improve or rop it. .. Management *n small businesses, management may inclu e the owners. *n huge organi<ations, however, management is usually ma e up of hire professionals who are entruste with the responsibility of operating the business or a part of the business. They act as agents of the owners. The managers, whether owners or hire , regularly face economic ecisions > $ow much supplies will we purchase1 Ao we have enough cash1 $ow much i we make last year1 Ai we meet our targets1 All those, an many other ecisions, re(uire analysis of accounting information. +. !en ers !en ers of fun s such as banks an other financial institutions are intereste in the companyBs ability to pay liabilities upon maturity 4solvency5. @. Tra e cre itors or suppliers !ike len ers, tra e cre itors or suppliers are intereste in the companyBs ability to pay obligations when they become ue. They are nonetheless especially intereste in the company"s li"uidity -- its ability to pay short-term obligations.
http677www.accountingverse.com 3age 5
-. Covernment Coverning bo ies of the state, especially the ta8 authorities, are intereste in an entity"s financial information for ta8ation an regulatory purposes. Ta8es are compute base on the results of operations an other ta8 bases. *n general, the state woul like to know how much the ta8payer is making to etermine the ta8 ue thereon. D. Employees Employees are intereste in the companyBs profitability an stability. They are after the ability of the company to pay salaries an provi e employee benefits. They may also be intereste in its financial position an performance to assess the possibility of company e8pansion an career opportunities. ,. 2ustomers When there is a long-term involvement or contract between the company an its customers, the customers may be intereste in the companyBs ability to continue its e8istence an its stability of operations. This nee is also heightene in cases where the customers epen upon the entity. For e8ample, a istributor 4reseller5, the customer in this case, is epen ent upon the manufacturing company from which it purchases the items it resells. F. Ceneral 3ublic Anyone outsi e the company such as researchers, stu ents, analysts an others are intereste in the financial statements of a company for some vali reason.
"nternal and / ternal .sers

The users may be classifie into internal an e ternal users. *nternal users refer to managers who use accounting information in making ecisions relate to the company"s operations. E8ternal users, on the other han , are not involve in the operations of the company but hol some financial interest. The e8ternal users may be classifie further into users with direct financial interest > owners, investors, cre itors? an users with indirect financial interest > government, employees, customers an the others.
Author0s 1otes$
*"ll leave you a (uestion to help you better appreciate the purpose of an nee for accounting.
3age 6
Assume we are looking into two companies. For istinction, we"ll name the first one 2ompany A an the other 2ompany :. #uppose you have %-',''' an are planning to invest your money an receive annual returns from share in profits. Which company woul you invest it in > Company A or '? Can(t pic#? Then you get the point.
Lesson 4
'&pes of Accounting
As a result of economic an technological evelopments, a number of speciali<e fiel s in accounting have emerge . The famous branches or types of accounting are6
1. )inancial Accounting
Financial accounting involves recor ing an classifying business transactions, an preparing an presenting financial statements to be use by internal and e)ternal users. *n the preparation of financial statements, strict compliance with generally accepted accounting principles or CAA3 is observe . Financial accounting is primarily concerne in processing historical ata.
2. 2anagerial Accounting
Managerial or management accounting focuses on provi ing information for use by internal users, the management. This branch eals with the nee s of the management rather than strict compliance with generally accepte accounting principles. Managerial accounting involves financial analysis, bu geting an forecasting, cost analysis, evaluation of business ecisions, an similar areas.
3. ,ost Accounting
#ometimes consi ere as a subset of management accounting, cost accounting refers to the recor ing, presentation, an analysis of manufacturing costs. 2ost accounting is very useful in manufacturing businesses since they have the most complicate costing process. 2ost accountants also analy<e actual an stan ar costs to help managers etermine future courses of action regar ing the company"s operations.
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4. Auditing
E)ternal auditing refers to the e8amination of financial statements by an in epen ent party with the purpose of e8pressing an opinion as to fairness of presentation an compliance with CAA3. !nternal auditing focuses on evaluating the a e(uacy of a company"s internal control structure by testing segregation of uties, policies an proce ures, egrees of authori<ation, an other controls implemente by management.
!. 'a Accounting
Ta8 accounting helps clients follow rules set by ta8 authorities. *t inclu es ta8 planning an preparation of ta8 returns. *t also involves etermination of income ta8 an other ta8es, ta8 a visory services such as ways to minimi<e ta8es legally, evaluation of the conse(uences of ta8 ecisions, an other ta8-relate matters.
3. Accounting *&ste%s
Accounting systems involves the evelopment, installation, implementation, an monitoring of accounting proce ures an systems use in the accounting process. *t inclu es the employment of business forms, accounting personnel irection, an software management.
4. )iduciar& Accounting
Fi uciary accounting involves han ling of accounts manage by a person entruste with the custo y an management of property of or for the benefit of another person. E8amples of fi uciary accounting inclu e trust accounting, receivership, an estate accounting.
5. )orensic Accounting
Forensic accounting involves court an litigation cases, frau investigation, claims an ispute resolution, an other areas that involve legal matters. This is one of the popular tren s in accounting to ay.
)ocusing on *peciali6ations
*f you want to focus on a speciali<ation, you may want to consi er obtaining an accounting certification in your chosen fiel . *t will give you an e ge over those who are uncertifie . Aue to the increasing population an eman for competitive professionals, you nee to step it up a little to get recogni<e . #ome of the most famous certifications inclu e the 2ertifie 3ublic Accountant 423A5, 2ertifie Management Accountant 42MA5, 2ertifie *nternal Au itor 42*A5, 2ertifie Financial 3lanner 42F35, an 2ertifie *nformation #ystems Au itor 42*#A5.
Lesson !
Areas of Accounting #ractice

Accounting career opportunities may be ivi e into four broa areas or scope of practice.
1. #u7lic Accounting
3ublic accounting refers to the practice followe by accountants who serve clients on a pro0ect or contractual basis. These accountants work in 23A firms or in ivi ually to provi e au it an attestation, ta8 planning an preparation, an a visory services to their clients. *n 23A firms, new accountants start as accounting or au it staff an work their way up to the 0unior accountant, senior accountant, supervisor, manager, an partner positions. After gaining enough e8perience, they may also start a public accounting firm of their own.
2. #rivate Accounting
*n private accounting, also known as practice in commerce and industry, an accountant serves only one company. Accountants in private accounting provi e a staff function which supports the company by performing accounting-relate tasks. 3ositions in private practice inclu e entry-level 0obs such as bookkeeper, accounting clerk, financial analyst, internal au itor, an others. From there, new entrants can work their way up the organi<ational chart an get to key management positions such as 2hief *nternal Au itor, 2ontroller *Chief +anagement Accountant or Chief Accounting ,fficer-, an 2hief Financial /fficer 42F/5.
3. 8overn%ent Accounting
Covernment agencies also nee accountants. These agencies nee accounting information to help them plan, bu get, forecast, an allocate government fun s. #tate au itors are also employe by the government to ensure the proper use an allocation of the sai fun s.
4. Accounting /ducation
This area is ma e up of accountants who are into teaching, research, an training G evelopment. Accountants can pursue a career as a faculty member in a school, an author of an accounting book, a researcher, trainer, or review instructor. =ote that it is not unusual to work in more than one area. *n fact, many accounting professionals engage in more than one scope of practice. /ne may be provi ing public accounting services while having a part-time 0ob in teaching. Another may be employe by a multi-national company or by a government agency while also working as a bookkeeping consultant.
Lesson 3
'&pes and )or%s of Business

A business is an organi<ation that uses economic resources or inputs to provi e goo s or services to customers in e8change for money or other goo s an services.
3 '&pes of Businesses
1. *ervice Business
A service type of business provi es intangible pro ucts *products with no physical form-. #ervice type firms offer professional skills, e8pertise, a vice, an other similar pro ucts. E8amples of service businesses are6 schools, repair shops, hair salons, banks, accounting firms, an law firms.
2. 2erchandising Business
This type of business buys pro ucts at wholesale price an sells the same at retail price. They are known as "buy an sell" businesses. They make profit by selling the pro ucts at prices higher than their purchase costs. A merchan ising business sells a pro uct without changing its form. E8amples are6 grocery stores, convenience stores, an other resellers.
3. 2anufacturing Business
9nlike a merchan ising business, a manufacturing business buys pro ucts with the intention of using them as materials in making a new pro uct. Thus there is a transformation of the pro ucts purchase . Manufacturing businesses combine raw materials, labor, and factory e)penses in pro uction. The manufacture goo s will then be sol to customers.
9&7rid Business
$ybri businesses are companies that may be classifie in more than one type of business. A restaurant, for e8ample, combines ingre ients in making a fine meal, sells a col bottle of wine, an fills customer or ers.=onetheless, these companies may be classifie accor ing to their ma0or business interest. *n that case, restaurants are more of the service type -- they provi e dining services.
)or%s of Business -rgani6ations

1. *ole #roprietorship
A sole proprietorship is a business owne by only one person. *t is easy to set-up an is the least costly among all forms of ownership. The owner faces unlimited liability? meaning, the cre itors of the business may go after the personal assets of the owner if the business cannot pay them. The sole proprietorship form is usually a opte by small business entities.
2. #artnership
A partnership is a business owne by two or more persons who contribute resources into the entity. The partners ivi e the profits of the business among themselves. *n general partnerships, all partners have unlimite liability. *n limited partnerships, cre itors cannot go after the personal assets of the limite partners.
3. ,orporation
A corporation is a business organi<ation that has a separate legal personality from its owners. /wnership in a stock corporation is represente by shares of stoc#. The owners 4stockhol ers5 en0oy limite liability but have limite involvement in the company"s operations. The board of directors, an electe group from the stockhol ers, controls the activities of the corporation. *n a ition to those basic forms of business ownership, these are some other types of organi<ations that are common to ay6
Li%ited Lia7ilit& ,o%pan&

!imite liability companies 4!!2s5 in the 9#A, are hybri forms of business that have characteristics of both a corporation an a partnership. An !!2 is not incorporate ? hence, it is not consi ere a corporation. =onetheless, the owners en0oy limite liability like in a corporation. An !!2 may elect to be ta8e as a sole proprietorship, a partnership, or a corporation.
,ooperative
A cooperative is a business organi<ation owne by a group of in ivi uals an is operate for their mutual benefit. The persons making up the group are calle members. 2ooperatives may be incorporate or unincorporate .#ome e8amples of cooperatives are6 water an electricity 4utility5 cooperatives, cooperative banking, cre it unions, an housing cooperatives.
*u%%ar&$ "ntroduction to Accounting

This is a summary of the topics covere in Chapter ./ !ntroduction to Accounting un er the Accounting 'asics tutorial series. ;ou can always check the full lessons anytime.
What is Accounting
Accounting is regar e as the language of business. *t is a means through which business entities communicate information to ifferent users. The users use it in making informe ecisions. The American *nstitute of 2ertifie 3ublic Accountants 4A*23A5 efine accounting as6 "the art of recor ing, classifying, an summari<ing in a significant manner an in terms of money, transactions an events which are, in part at least of financial character, an interpreting the results thereof."
#urpose of Accounting
The A*23A also provi e this efinition6 "Accounting is a service activity. *ts function is to provi e (uantitative information, primarily financial in nature, about economic entities that is inten e to be useful in making economic ecisions, in making reasone choices among alternative courses of action." The American Accounting Association 4AAA5 efine accounting as6 "the process of i entifying, measuring an communicating economic information to permit informe 0u gment an ecision by users of the information." :ase on the above efinitions an the very nature of accounting as the language of business, it is evi ent that the basic purpose of accounting is to provide information needed by users in ma#ing economic decisions. These users inclu e6 current an potential investors, management, len ers, cre itors, the government, employees, customers, an the general public. These users have varie interests an therefore have ifferent information nee s.
Branches of Accounting and Areas of #ractice

Accounting is one of the ol est business isciplines. *t has never faile to provi e opportunities to careerseekers. The stea y increasing eman for accounting services makes it a stable profession ami st economic fluctuations.
3age 12
Aifferent fiel s of speciali<ation have evolve over the years. To ay, hol ing a certification in a specific fiel gives the hol er an e ge over those who are uncertifie . #ome of the most important fiel s of accounting inclu e6 financial accounting, management accounting, cost accounting, au iting, ta8 accounting, accounting information systems, fi uciary, an forensic accounting. Accounting professionals work in one or more of the @ ma0or areas of accounting practice6 public accounting, private accounting, government accounting, an accounting e ucation. Accounting professionals in public accounting work in 23A firms or in ivi ually in provi ing accounting an au iting services to clients. An accountant in private accounting is hire by a business to work as an employee of that entity. 0overnment accountants work in the government an its agencies. Accounting education or aca eme inclu es accountants who pursue careers as instructors, reviewers, researchers, an authors.
'&pes and )or%s of Businesses

The three ma0or types of businesses are6 service business, merchan ising business, an manufacturing business. %ervice businesses provi e intangible pro ucts such as skills an e8pertise to customers. +erchandising concerns buy goo s an sell the same at higher prices. +anufacturing businesses, on the other han , purchase goo s an use them to make new pro ucts that are then to be sol . The basic forms of organi<ation or business ownership inclu e6 sole proprietorship, partnership, an corporations. A sole proprietorship is owne by only one person, known as sole proprietor, who bears an unlimite liability. 1artnership is owne by two or more persons calle partners. A general partner has unlimite liability, whereas, limite partners are liable only up to the amount of their investment. A corporation is owne by stockhol ers who en0oy limite liability. They are nonetheless not involve in the actual operations of the company. The boar of irectors runs the company for the stockhol ers. *t is essential to learn about the types of businesses an forms of organi<ations in pursuing business stu ies. *n accounting, it is important to be familiar with them because of the ifferences in accounting practices.
:ui6$ "ntroduction to Accounting

Test your accounting skills with this short (ui< on !ntroduction to Accounting un er the Accounting 'asics tutorial series. "nstructions$ For each item, choose the letter that correspon s to your answer. ;ou can check your answers later through the link below. *.2 items&. Which oes not form part of the efinition of accounting1 a. 3rovi es information b. 9seful in ecision making c. 3rimarily concerne with historical ata . 2oncerne with transactions of financial character .. Accounting provi es which of the following information1 a. Hualitative information b. Huantitative information c. Financial information . All of the above +. Accounting is a. An art b. A science c. :oth an art an a science . =either an art nor a science @. Which of the following is an economic entity1 a. A charitable institution b. A grocery store c. :oth A an : . =one of the above -. The branch of accounting that focuses on the preparation an presentation of financial statements primarily to e)ternal users. a. Financial accounting b. Management accounting c. E8ternal au iting
. Ta8 accounting D. 3rovi es information use internally for planning, evaluating, analy<ing, an controlling business ecisions an operations. a. *nternal au iting b. Financial accounting c. Management accounting . Forensic accounting ,. They are intereste in a company"s ability to continue its e8istence, especially if they are heavily epen ent on the company"s operations. a. Covernment b. 2ustomers c. #uppliers . !en ers F. The area of practice where 23As provi e accounting services to several clients on a contractual or engagement basis1 a. 3ublic accounting b. 3rivate accounting c. Covernment accounting . E ucation or aca eme I. Tra e cre itors are most intereste in which accounting information1 a. 3rofitability b. A aptability c. !i(ui ity . Ability to continue operations &'. The basic purpose of accounting is to a. 3rovi e information for ecision-making b. 2ompute the applicable income ta8 c. 2omply with state re(uirements
. Aetermine the net income of a company
Answers$ &.c .. +.c @.c -.a D.c ,.b F.a I.c &'.a
3age 16

What Is Accounting?: Lesson 1

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What Is Accounting?: Lesson 1

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"When you want something, all the universe conspires in helping you achieve it.

"-- The Fifth Mountain

1. Accounting is considered an art

2. Accounting involves interconnected "phases"

3. Accounting is concerned with transactions and events having financial character

4. Business transactions are e pressed in terms of money

!. "nterpreting the results

#urpose of Accounting$ "ts #ractical "%portance

'he #urpose of Accounting

.sers of )inancial *tate%ents

"nternal and / ternal .sers

Areas of Accounting #ractice

'&pes and )or%s of Business

)or%s of Business -rgani6ations

Li%ited Lia7ilit& ,o%pan&

*u%%ar&$ "ntroduction to Accounting

Branches of Accounting and Areas of #ractice

'&pes and )or%s of Businesses

:ui6$ "ntroduction to Accounting

. Aetermine the net income of a company

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