Ch.1 Accounting in Business PDF

Accounting reports the facts of company operations operating activities for a business are sales, customer service, administration and marketing. These activities are part of the normal functioning of a business that affects its monthly, quarterly and annual income and profits. What is...

Accounting reports the facts of company operations operating activities for a business are sales, customer service, administration and marketing. These activities are part of the normal functioning of a business that affects its monthly, quarterly and annual income and profits. What is accounting? Measuring and summarizing business activities, interpreting financial statements, and communicating the results to management and other decision makers  Accounting they can provide enormous information about a company's revenue, expenses, profitability, debt load, and the ability to meet its short-term and long-term financial obligations Loading… What is accounting? Measuring and summarizing business activities, interpreting financial statements, and communicating the results to management and other decision makers  Accounting This stage revolves around the process of communicating data analytics results to decision makers in the most effective way in order to facilitate decision What is accounting? Measuring and summarizing business activities, interpreting financial statements, and communicating the results to management and other decision makers Accounting is an information system that measures, processes, and communicates financial information about an economic entity.  Accounting What is accounting information? the means by which we measure and communicate economic events. Whether you manage a business, make investments, or monitor how you receive and use your money. Our primary goal in this course is to develop your ability to understand and use accounting information in making economic decisions. Accounting is an information system that measures, processes, and communicates financial information about an economic entity. Accounting economic entity is a unit that exists independently, such as a business, a hospital, or a governmental body. Accounting Information system measures, processes, and communicates financial information about an economic entity. Accounting Accountants focus on the needs of decision makers who use financial information, whether those decision makers are inside or outside a business or other economic entity. Accountants provide a vital service by supplying the information decision makers need to make What is the role of accountants? The main role of an accountant is to collect, analyze, record and report the financial data of a company or an individual. They ensure that a company complies with all the government rules and regulations. An accountant also helps analyze financial data to make data-driven business decisions Accounting What is the role of accountants? accountant duties and responsibilities include: Preparing accounts and tax returns. Monitoring spending and budgets. Auditing and analysing financial performance. Financial forecasting and risk analysis. Advising on how to reduce costs and increase profits. Compiling and presenting financial and budget reports  Accounting is a link between business activities and decision makers. How does accounting connect business activities and decision makers. ? 1. Accounting measures business activities by recording data about them for future use. Loading… 2. The data are stored until needed and then processed to become useful information. 3. The information is communicated through reports to decision makers. In other words, data about business activities are the input to the accounting system, and useful information for decision makers is the output.  Nature of Business and Accounting what is the business ? A business is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers. What is the purpose of the business ? The objective of most businesses is to earn a profit. What is the profit? Profit is the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services. Accounting as a language of business Why Accounting is called the Language of Business? because it communicates data that help people make better decisions. Accounting as a language of business Who uses accounting information? People using accounting information are divided into two groups: external users and internal users. Financial accounting focuses on the needs of external users, and managerial accounting focuses on the needs of internal users. Users Of Accounting Information Who are the External Users? people outside the business entity (organization) who use accounting information. So, External users of accounting information do not directly run the organization and have limited access to its accounting information. These users get accounting information from general-purpose financial statements.  Users Of Accounting Information What is the list of external users? And How do they benefit from accounting information? 1. Lenders (creditors) loan money or other resources to an organization. (Banks, savings and loans, and mortgage companies are lenders). Lenders use information to assess if an organization will repay its loans. 2. Shareholders (investors) are the owners of a corporation. They use accounting reports to decide whether to buy, hold, or sell stock. they use accounting information to evaluate the performance of executive management. 3. External (independent) auditors examine financial statements to verify that they are prepared according to generally accepted accounting principles.  Users Of Accounting Information What is the list of external users? And How do they benefit from accounting information? 1. Non-managerial and nonexecutive employees and labor unions use external information to bargain for better wages. 2. Internal Revenue Service (IRS) requires accounting reports for computing taxes. 3. Voters and government officials use information to evaluate government performance. 4. Contributors to nonprofits use information to evaluate the use and impact of donations. 5. Suppliers use information to analyze a customer before extending credit. 6. Customers use financial reports to assess the stability of potential suppliers.  Users Of Accounting Information Who are the Internal Users? People within a business organization who use financial information. So, Internal users of accounting information directly manage the organization. Internal reports are designed for the unique needs of managerial or executive employees, such as the chief executive officer (CEO).  Users Of Accounting Information What is the list of internal users? And How do they benefit from accounting information? 1. Purchasing managers need to know what, when, and how much to purchase. 2. Human resource managers need information about employees’ payroll, benefits, and performance. 3. Production managers use information to monitor costs and ensure quality. 4. Distribution managers need reports for timely and accurate delivery of products and services. 5. Marketing managers use reports to target consumers, set prices, and monitor consumer needs. 6. Service managers use reports to provide better service to customers.  Accounting as a language of business Before they lend the money to the economic entity need to check the ability of the borrower to repay the loan by Each of them needs to using the accounting have their own question information answered so that they can make the right decision.  Accounting as a language of business to estimate returns to stockholders, determine growth prospects, and decide whether a firm is a good credit Each of them needs to risk. have their own question answered so that they can make the right decision.  Accounting as a language of business Managers need accounting information to plan, control and make business decisions. Do officials control the Each of them needs to company's resources wisely. have their own question answered so that they can make the right decision. The Accounting Process What is the accounting process? It includes three basic accounting processes: In each of these process, there are a lot of steps that we will learn in the future. this chart explain how economic activities flow into the accounting process. The accounting process produces accounting information used by decision makers in making economic decisions and taking specific actions. These decisions and actions result in economic activities that continue the cycle. The Accounting Process So, Accounting links decision makers with economic activities—and with the results of their decisions Types Of Accounting Information Just as there are many types of economic decisions, there are also many types of accounting information. The terms financial accounting, management accounting, and tax accounting often are used in describing three types of accounting information that are widely used in the business community. Types Of Accounting Information What is the financial accounting information? Financial accounting information refers to information describing the financial resources, obligations, and activities of an economic entity (either an organization or an individual). Accountants use the term financial position to describe an entity’s financial resources and obligations at a point in time and the term results of operations to describe its financial activities during the year. Financial accounting information is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. TYPES OF ACCOUNTING INFORMATION What is the managerial accounting information? Management (or managerial) accounting involves the development and interpretation of accounting information intended specifically to assist management in operating the business. Managers use this information in setting the company’s overall goals, evaluating the performance of departments and individuals, deciding whether to introduce a new line of products, and making virtually all types of managerial decisions. TYPES OF ACCOUNTING INFORMATION What is the managerial accounting information? A company’s managers and employees constantly need information to run and control daily business operations. For example, they need to Loading… know the amount of money in the company’s bank accounts; and the amounts owed to specific creditors. Much management accounting information is financial in nature but is organized in a manner relating directly to the decision at hand. TYPES OF ACCOUNTING INFORMATION What is the Tax accounting information? The preparation of income tax returns is a specialized field within accounting. To a great extent, tax returns are based on financial accounting information. However, the information often is adjusted or reorganized to conform with income tax reporting requirements. the type of tax return you’re responsible for will depend on your business size, and structure. Accounting Systems What is the accounting system? Accounting system is a set of accounting processes with integrated procedures and controls. [consists of the personnel, procedures, technology, and records used by an organization]:  What is the accounting system? Accounting Systems to develop accounting information to communicate this information to decision makers. The design and capabilities of these systems vary greatly from one organization to another. But in every case, the basic purpose of the accounting system remains the same: to meet the organization’s needs for information as efficiently as possible Many factors affect the structure of the accounting system within a particular organization. Among the most important are: 3. the company’s needs for accounting information 4. the resources available for operation of the system. Accounting Systems The diagram here describing accounting as an information system focuses attention on the information accounting provides, the users of the information, and the support for financial decisions that is provided by the information. The information system produces the information presented in the middle of the diagram: Accounting Systems Financial position, profitability, and cash flows. This information meets the needs of users of the information investors, creditors, managers, and so on—and supports many kinds of financial decisions —performance evaluation and resource allocation, among others. These relationships are consistent with what we have already learned —namely, that accounting information is intended to be useful for decision-making purposes.  Determining Information Needs The types of accounting information that a company develops vary with such factors as the size of the organization, whether it is publicly owned, and the information needs of management. For example, income tax regulations require every business to have an accounting system that can measure the company’s taxable income and explain the nature and source of every item in the company’s income tax return. For Example: securities laws require publicly owned companies to prepare financial statements in conformity with generally accepted accounting principles. These statements must be filed with the Securities and Exchange Commission, distributed to stockholders, and made available to the public.  Basic Functions Of An Accounting System In developing information about the activities of a business, every accounting system performs the following basic functions: 1. Interpret and record the effects of business transactions. 2. Classify the effects of similar transactions in a manner that permits determination of the various totals and subtotals useful to management and used in accounting reports. 3. Summarize and communicate the information contained in the system to decision makers. The differences in accounting systems arise primarily in the manner, frequency, and speed with which these functions are performed. As if we used accounting systems that are largely computer based or the manual system. Components Of Internal Control In developing its accounting system, an organization also needs to be concerned with developing a sound system of internal control. What is the internal control? is a process designed to provide reasonable assurance that the organization produces reliable financial reports, complies with applicable laws and regulations, and conducts its operations in an efficient and effective manner. Who Should Do Internal Control? A company’s board of directors, its management, and other personnel are charged with developing and monitoring internal control.  COMPONENTS OF INTERNAL CONTROL What are the components of internal control ? 1. An organization’s control environment is the foundation for all the other elements of internal control, setting the overall tone for the organization. Factors that affect a company’s control environment are: the integrity, ethical values, and competence of the company’s personnel. management’s philosophy and operating style. management’s assignment of authority and responsibility procedures for the hiring and training of personnel. oversight by the board of directors. The control environment is particularly important because fraudulent financial reporting often results from an ineffective control environment.  COMPONENTS OF INTERNAL CONTROL What are the components of internal control ? 1. Risk assessment involves identifying, analyzing, and managing those risks that pose a threat to the achievement of the organization’s objectives. For example, a company should assess the risks that might prevent it from preparing reliable financial reports and then take steps to minimize those risks. 2. Control activities are the policies and procedures that management puts in place to address the risks identified during the risk assessment process. Examples of control activities include approvals, authorizations, verifications, reconciliations, reviews of operating performance, physical safeguarding of assets, and segregation of duties. 3. Information and communication involves developing information systems to capture and communicate operational, financial, and compliance-related information necessary to run the business. COMPONENTS OF INTERNAL CONTROL The five components of internal control are: 1. All internal control systems need to be monitored. Monitoring enables the company to evaluate the effectiveness of its system of internal control over time. Monitoring is generally accomplished through ongoing management and supervisory activities, as well as by periodic separate evaluations of the internal control system. Most large organizations have an internal audit function, and the activities of internal audit represent separate evaluations of internal control. Effective information systems capture both internal and external information. In addition, an effective control system is designed to facilitate the flow of information. Employees must receive the message that top management views internal control as important, and they must understand their role in the internal control system and the roles of others. Objectives Of External Financial Reporting Financial accounting provides information about the financial resources, obligations, and activities of an enterprise that is intended for use primarily by external decision makers—investors and creditors. Three Objective of external financial reporting: 1. The first objective is the most general and is to provide information that is useful in making investment and credit decisions. As we indicated earlier, investors and creditors are the primary focus of external financial reporting. 2. The second objective, which is more specific than the first, is to provide information that is useful in assessing the amount, timing, and uncertainty of future cash flows. As we discussed earlier, investors and creditors are interested in future cash flows to them, so an important objective of financial reporting is to provide general information that permits that kind of analysis. Objectives Of External Financial Reporting 1. The most specific objective of external financial reporting is to provide information about the enterprise’s resources, claims to those resources, and how both the resources and claims to resources change over time. An enterprise’s resources are often referred to as assets, and the primary claims to those resources are the claims of creditors and owners, known as liabilities and owners equity. One of the primary ways investors and creditors assess whether an enterprise will be able to make future cash payments is to examine and analyze the enterprise’s financial statements.  Type of financial statement What is the financial statement ? A financial statement is simply a monetary declaration of what is believed to be true about an enterprise. When accountants prepare financial statements, they are describing in financial terms certain attributes of the enterprise that they believe fairly represent its financial activities. What are the types of financial statements? 1. Statement of financial position (balance sheet): is a position statement that shows where the company stands in financial terms at a specific date. 2. Income statement: is an activity statement that shows details and results of the company’s profit-related activities for a period of time (for example, a month, quarter [three months], or year). [An income statement is an activity statement that depicts the profitability of an enterprise for a designated period of time]. 3. Statement of cash flows: is an activity statement that shows the details of the company’s activities involving cash during a period of time.[the statement of cash flows depicts the ways cash has changed during a designated period].