What is accounting all about Overview and concepts

2007/01/15International Business Program Financial Accounting 1 What is it? Documentation or communication?

2007/01/15International Business Program Financial Accounting 2 What is it? Accounting is NOT documentation –Of course, documentation is necessary –That’s why we use computers –We do NOT learn documentation in the classroom. Why? –Accounting is NOT a technical, problem solving discipline!

2007/01/15International Business Program Financial Accounting 3 What is it? Accounting is communication –About a business enterprise –Much is financial in nature –To persons who are knowledgeable –Persons willing and able to spend time –Support informed decisions –This class is for EXTERNAL users

2007/01/15International Business Program Financial Accounting 4 Historical Accounting in 2000s originated in what is now northern Italy in 1400s. What was going on then? Why do we need to know this?

2007/01/15International Business Program Financial Accounting 5 Historical Accounting in 2000s originated in what is now northern Italy in 1400s. What was going on then? Why do we need to know this? –Accounting reflects environment and culture –Accounting NOT scientific and universal

2007/01/15International Business Program Financial Accounting 6 Historical Northern Italy in 1400s –End of feudal era –Specialization of business; trade –Large scale ventures, notably Venice –Outside investors, creditors, need for accountability –Money as we know it established –Banks as we know them emerged

2007/01/15International Business Program Financial Accounting 7 Historical Northern Italy in 1400s (Continued) –Role of Roman Catholic church Itself an investor and creditor Protect members’ interests; accountability Repository of knowledge –Br. Luca Paciolo documented accounting scheme (We’ll be seeing him much more)

2007/01/15International Business Program Financial Accounting 8 Historical Accounting had origins in northern Italy Did not develop in Italy, though Major development in UK and Anglo- Saxon countries Why? (We will explore as we go along)

2007/01/15International Business Program Financial Accounting 9 Forms of Business Sole proprietorship Partnership (but beware because many ‘partnerships’ are corporations) Corporation-most common –Separate from owners –Limited liability Group – most important

2007/01/15International Business Program Financial Accounting 10 Forms of Business Group – most important –Combinations of corporations –Essentially one business –Several reasons (see textbook) –Sometimes required Tax purposes Operate in different countries

2007/01/15International Business Program Financial Accounting 11 Objectives of Enterprises Create value Various stakeholders –Shareholders –Employees –Supply chain –National, supra-national, world economy –Society as a whole

2007/01/15International Business Program Financial Accounting 12 Purpose of Enterprises ?

2007/01/15International Business Program Financial Accounting 13 Purpose of Enterprises Produce goods and services Market willing to buy Price market willing to pay Purpose is NOT to make a profit Profit is necessary but not sufficient condition

2007/01/15International Business Program Financial Accounting 14 Users of Accounting Information See list in textbook. E.g. –Owners (investors) –Employers –Lenders –Supply chain –INFORMATION INTERMEDIARIES E.g. Financial analysts

2007/01/15International Business Program Financial Accounting 15 Users of Accounting Information In this class interest is in EXTERNAL users Management obviously has an interest Separate area called management accounting (see text)

2007/01/15International Business Program Financial Accounting 16 Key accounting concepts Accounting serves markets Information intermediaries analyze information for markets Markets are global Accounting must be global IASB and IFRS

2007/01/15International Business Program Financial Accounting 17 IFRS Developed by IASB Mandatory in European Union –But only for public companies Requires or voluntary in many other countries Converging with U.S. GAAP Brief history – formerly IAS

2007/01/15International Business Program Financial Accounting 18 Objectives of Financial Statements Financial position –Balance Sheet Results of management activity –Income statement –Cash flow statement Other important information –Changes in equity –Explanatory notes

2007/01/15International Business Program Financial Accounting 19 Assumptions and principles Covered in text; highlights here Accrual basis –Based on economic event –Not necessarily cash Going concern –Exist for foreseeable future

2007/01/15International Business Program Financial Accounting 20 Assumptions and principles (Continued) Covered in text; highlights here Entity has separate identity from owners Accounting period-only meaningful if reported periodically, usually one year

2007/01/15International Business Program Financial Accounting 21 Qualitative Characteristics Read from text; highlights here –Understandable to informed user Focus on information intermediaries –Comparable Over time – most important Other entities – less important

2007/01/15International Business Program Financial Accounting 22 Qualitative Characteristics (Continued) Read from text; highlights here –Relevance – make a difference –Materiality – can influence decisions

2007/01/15International Business Program Financial Accounting 23 Qualitative Characteristics (Continued) Read from text; highlights here –Reliability NOT ACCURACY Substance over form; not interested in legalities, but economic reality Prudence –Does NOT allow hidden reserves, understatement of assets and income!

2007/01/15International Business Program Financial Accounting 24 Other Characteristics Constraints Hierarchy (See textbook discussion for both)