Module 1: Overview of Accounting in Business - PDF

Module 1: Overview of Accounting and Its Importance in Business Dee Laila C. Buhian, DBA Learning Objectives: By the end of this module, students should be able to: 1. Define accounting and its key functions. 2. Explain the role of accounting in business decision-making with real-worl...

Module 1: Overview of Accounting and Its Importance in Business Dee Laila C. Buhian, DBA Learning Objectives: By the end of this module, students should be able to: 1. Define accounting and its key functions. 2. Explain the role of accounting in business decision-making with real-world examples. 3. Identify and describe different types of users of accounting information. 4. Recognize the importance of accounting in various business activities using practical examples. Topic 1: What is Accounting? Key Concepts:  Definition of Accounting: Accounting is the systematic process of recording, classifying, summarizing, and interpreting financial transactions. It involves reporting financial information to users to make informed decisions.  Key Functions of Accounting: o Recording transactions (Bookkeeping): Accurately documenting each business transaction, such as sales and purchases. Example: A company sells goods worth Php. 10,000.00 to a customer and records this as a sales transaction in its books. o Classifying transactions: Organizing financial transactions into categories such as assets, liabilities, income, and expenses. Example: Sales revenue is classified as income, and office supplies purchased are classified as expenses. o Summarizing information: Preparing reports like financial statements to summarize all transactions over a specific period. Example: A company prepares an income statement to show its total revenue, expenses, and profit for the month. o Interpreting data: Analyzing financial information to make informed decisions. Example: Management uses financial ratios from the balance sheet to evaluate liquidity and decide whether to take a loan.  Importance of Accounting: o It allows businesses to monitor their financial health, profitability, and overall performance. o Helps stakeholders like owners, managers, and investors understand the financial position of the business. o Example: If a company consistently shows losses in its financial statements, investors might reconsider investing. Topic 2: The Role of Accounting in Business Key Concepts:  Business Decisions Based on Accounting Data: o Budgeting: Using accounting data to allocate financial resources to different departments. Example: A company estimates its future revenue based on past financial records and allocates a portion to marketing expenses. o Cost Control: Analyzing costs in financial statements to reduce unnecessary expenses. Example: A restaurant examines its monthly financial report to find that food costs are too high and negotiates with suppliers for better prices. o Investment Decisions: Determining whether to invest in new projects or assets. Example: A tech company looks at its cash flow statements to decide whether it can afford to invest in new equipment. o Performance Evaluation: Reviewing financial data to assess a department's or product line's performance. Example: A retail chain reviews quarterly sales figures from its financial statements to determine if a store is profitable. Topic 3: Users of Accounting Information Key Concepts:  Internal Users: People inside the organization who use accounting information for decision- making. o Management: Uses accounting data to plan, budget, and control resources. Example: A company’s management uses sales reports to set future sales targets and decide on marketing strategies. o Employees: May use financial information to evaluate the company’s performance, job security, or profit-sharing. Example: An employee checks the company's annual profit report to assess potential for bonuses or job growth.  External Users: People outside the organization who need accounting information for decision- making. o Investors: Use financial reports to decide whether to invest in a company. Example: An investor reviews a company's income statement and balance sheet to determine if it’s profitable enough to buy shares. o Creditors: Banks and lenders assess the company’s ability to repay loans based on its financial position.  Example: A bank examines a company’s cash flow statement before approving a loan. o Government: Requires financial statements for tax assessments and compliance with regulations. Example: The Bureau of Internal Revenue (BIR) reviews a business’s financial statements to ensure accurate tax reporting. Topic 4: Types of Accounting Key Concepts:  Financial Accounting: Focuses on reporting financial information to external users through financial statements. o Example: A publicly listed company prepares annual reports with income statements, balance sheets, and cash flow statements for investors and regulators.  Managerial Accounting: Provides information to internal users, mainly management, for planning and control purposes. o Example: A manufacturing company uses cost accounting to track production costs and determine the profitability of each product.  Tax Accounting: Ensures compliance with tax laws and prepares tax returns. o Example: An accountant calculates a company’s tax liability based on revenue, expenses, and allowable deductions.  Auditing: The independent examination of financial records to ensure accuracy and compliance. o Example: A firm hires external auditors to verify the accuracy of its financial statements before presenting them to shareholders.