Accounting 101: Introduction to Bookkeeping and Accounting

Bookkeeping and Accounting Distinguished

• Bookkeeping is a procedural element of accounting that deals with recording and classifying financial transactions of a business.
• Accounting is a broader concept that involves recording, classifying, and summarizing financial transactions, as well as interpreting the results.

Accounting as the "Language of Business"

• Accounting is often referred to as the language of business because it provides quantitative financial information through financial statements.
• The three major information needed from financial statements are:
  • Financial Condition or Position (assets and liabilities)
  • Financial Performance or Results of Operations (net income or net loss)
  • Financing and Investing Activities (sources and applications of funds)

Brief History of Accounting

• The development of accounting began with Italian merchants' need for information.
• Luca Pacioli published the first known description of double-entry bookkeeping in 1494.
• The Industrial Revolution and the growth of corporations in the 19th century spurred the development of accounting.
• The introduction of income tax and the government's need for reliable information further contributed to the development of accounting.

Users of Financial Statements

Internal Users

• Owners use accounting information to manage and monitor the business and analyze returns on investment.
• Management uses accounting information to set goals, evaluate progress, and take corrective actions.
• Employees use accounting information to assess the enterprise's ability to compensate them and provide benefits.

External Users

• Potential Investors use accounting information to evaluate expected returns on investment.
• Other external users, such as creditors, regulatory bodies, and the general public, also use financial statements to make informed decisions.