Accounting in Business Chapter 1 Accounting in Business As with most texts, the first chapter will be devoted to an introduction to terms and techniques we will be using in the remaining chapters. For some, this may be your first business course and the terms will be new. We will be discussing many of the key concepts introduced here in the remaining chapters of the text.

Importance of Accounting is a system that Accounting Identifies Records information that is Relevant Communicates What is the purpose of accounting? What is the difference between accounting and bookkeeping? Bookkeeping is the general recordkeeping of an entities day to day activities, while accounting is the process of analyzing and drawing conclusions from this information. The bookkeeper of a shoe store keeps the day to day records as to how many shoes are sold and what bills need to be paid. The accountant analyzes this data to evaluate the profitability and health of the business. Accounting is known as the language of business. The data that it provides is what drives all of the day to day operations of any business, when referring to a business, one refers to any organization that has to objective of making a profit from the sale of goods and services. Not for profit organizations also rely on accounting data. Accounting is broken down into a 3 step process, the bookkeeper usually does 1 and 2, while the accountant focuses on #3. Reliable to help users make better decisions. Comparable

Accounting Activities Identifying Business Activities Recording Business Activities Communicating Business Activities Not all transactions entered into by a business entity are capable of being recorded. Our first task as accountants is to identify those transactions that may be recorded in the accounting system. In recording business transactions, we must follow the rules of double-entry bookkeeping. We will spend a significant amount of time early in the course discussing in detail the rules of the accounting process. Next, we should follow standard formatting when reporting information to users outside the organization. External users include stockholders of the company, lenders, various governmental agencies, and others.

Users of Accounting Information External Users Lenders Shareholders Governments Consumer Groups External Auditors Customers Internal Users Managers Officers/Directors Internal Auditors Sales Staff Budget Officers Controllers Who uses accounting information? Management Accounting vs. Financial Accounting Management Accounting is the area of accounting that provides information for decision-making activities of management within the business. Financial Accounting is the area of accounting that is concerned with providing useful information to those parties outside of the business. Who would be considered a concerned party outside of the business? Financial Accountants primarily are concerned with preparation of Financial Statements, which are distributed to these outside parties in an annual report.

Users of Accounting Information External Users Financial accounting provides external users with financial statements. Internal Users In this book we will spend most of our time developing financial accounting information for external users. Some of the material we cover will prove useful to managers and other internal decision makers. Managerial accounting provides information needs for internal decision makers.

Opportunities in Accounting Managerial General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Financial Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation Taxation Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans Accounting-related Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs Careers in accounting can follow many paths. There is great demand for financial accountants in the preparation of financial statements, dealing with regulatory agencies like the Internal Revenue Service, and consulting. Management accountants help track product costs, prepare budgets and serve as a consultant to managers. The field of taxation includes everything from the preparation of tax returns to consulting with clients about estate and gift planning. Individuals with accounting backgrounds may move into other areas of importance within an organization. Individuals with accounting training often become business owners and managers. They are in high demand in all financial and investigative fields. In all seriousness, accounting is THE major to pursue if you have an interest in business for your career. If you look within the WSOM, and other business schools Accounting continually has the highest graduate placement AND the highest starting salaries in the school. Being an Accountant does not limit you to sitting in an office and analyzing books.

Accounting Jobs by Area About twenty-five percent of accountants work in public accounting. Public accounting firms offer accounting, tax, and consulting services to a wide variety of clients. About sixty percent of accountants work for businesses/corporations, and fifteen percent work for governmental, not-for-profit, and educational organizations.

Ethics—A Key Concept Ethics Beliefs that distinguish right from wrong Accepted standards of good and bad behavior Ethical behavior is the cornerstone of the accounting profession. Recently, we have seen many corporate scandals involving individuals who acted in an unethical, and often times illegal, way. Ethics is the belief system that permits us to distinguish right from wrong. It is something that we develop over our lifetimes and serves to help us identify good and bad behavior. As a result of the lack of ethics that some feel has emerged in the profession, congress has passed the Sarbanes-Oxley act, and a regulatory body known as the PCAOB (Public Company Accounting Oversight Board) has emerged.

Guidelines for Ethical Decisions Make ethical decision Identify ethical concerns Analyze options You have faced ethical situations in school and will face similar situations at work. We should be capable of identifying ethical concerns and analyzing our options, that is, what is the right and wrong thing to do. Making an ethical decision means we choose the best option available under the circumstances. Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences.

Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Financial accounting in governed by a set of rules we call Generally Accepted Accounting Principles, or GAAP for short. Generally accepted accounting principles identify three major characteristics of information. First, the information must be relevant. Relevant information impacts the decision of the informed user for financial information. Second, the information must be reliable. Finally, the information must be comparable. Comparability helps us compare financial information from one period with that of the next period. - Organizations that govern accountants and state standards that they should adhere to: Financial Accounting Standards Board (FASB)- A Private independent organization that establishes standards for financial reporting in the United States. The FASB, is responsible for determining GAAP (Generally Accepted Accounting principles)- which are the authoritative guidelines that define accounting practice at a given time. Securities and Exchange Commission- The Government body that is responsible for regulating reporting practices for public corporations that are responsible for selling stocks and bonds. Internal Revenue Service- Government agency that defines tax related rules and accounting issues in the United States. Comparable Information Is helpful in contrasting organizations.

Setting Accounting Principles Financial Accounting Standards Board is the private group that sets both broad and specific principles. The Financial Accounting Standards Board is recognized as the group in the private sector that makes specific accounting principles. If an accountant departs from the principles established by the F A S B, proper disclosure of the departure must be made. In the public sector, the Securities and Exchange Commission has the authority to establish accounting principles for companies reporting to the agency. Currently, the Securities and Exchange Commission has accepted all pronouncements of the F A S B for use by reporting companies. The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public.

Principles of Accounting Cost Principle Accounting information is based on actual cost. Objectivity Principle Accounting information is supported by independent, unbiased evidence. Now Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. The objectivity principle states that accounting information must be unbiased and based upon independent evidence. The cost principle tell us that accounting information is based upon actual cost incurred. We refer to this cost as historical cost. The going-concern principle states that, in the absence of information to the contrary, the business entity is assumed to continue operations into the foreseeable future. Conservatism is another principle not on the slides that is VERY important.

Principles of Accounting Monetary Unit Principle Express transactions and events in monetary, or money, units. Revenue Recognition Principle Recognize revenue when it is earned. Proceeds need not be in cash. Measure revenue by cash received plus cash value of items received. Business Entity Principle A business is accounted for separately from other business entities, including its owner. The monetary unit principle tells us that we will only record accounting information that can be expressed in monetary units, usually dollars in the United States. The revenue recognition principle states that revenue is to be recorded in the accounts of the company when it is earned. We need not wait until cash is received before we recognize revenue. It may be difficult to follow this principle in the beginning of the course because you are probably a cash basis individual. You usually wait until cash is paid or received before recognizing a transaction. The business entity principle tells us that we must separate out the transaction of individual owners of a business from those of the business.