What is Accounting?
Accounting is a process of accumulating, summarizing and communicating financial information. Financial information can be of different types and serve different purposes,but it all comes from the same function – accounting.
Accounting is a service-based profession that provides reliable and relevant financial information useful in making decisions.
Financial information may include sales, expenses, taxes and other figures.
So, how exactly is this information prepared? There are several steps involved.
These steps are identification, recording and communication.
First, economic events are identified. A sale at a gas station, payment of taxes by a commercial enterprise, or purchase of insurance are all examples of economic events.
Second, all economic events are recorded. Recording is done to provide a history of a company's financial activities. In this step economic events are also classified and summarized.
Third, information about classified and summarized economic events is communicated to interested parties. Such communication may take several forms. One of them is financial statements about which we will talk later in this chapter.
Types of Accounting
Accounting provides information to several groups of people and for different purposes.
As a result, there are several kinds of accounting:
Financial accounting provides information to external users. Such external users can be investors, creditors, banks, regulatory bodies (i.e., Securities and Exchange
Commission, Internal Revenue Service, etc.). The information is usually in the form of financial statements (see more on the financial statements below). Managerial accounting provides information to internal users. Such internal users include a company’s managers and employees. The information accumulated and presented by managerial accounting function includes sales figures, gross margin analysis, cost information broken down by product line, etc.
As a rule, managerial accounting information provides more detail than the
financial accounting information and sometimes includes confidential data not
available to external users.
Tax accounting can be distinguished as another kind. Tax accounting deals mainly with calculation of taxes (i.e., income taxes, sales and use taxes, etc.). Because rules regulating calculation of taxes are different from those governing financial statements preparation and presentation, tax accounting should be performed separately and in parallel to financial and managerial accounting. Usually, there is a tax department with a company that deals with tax accounting, but works closely with the financial accounting department.
• Account is a record within an accounting system which is used to collect and store similar information for a specific asset, liability, equity, revenue, or expense.
• Account balance is the difference between the debit and the credit side of a T account.
• Accounting is a service-based profession that provides reliable and relevant financial information useful in making decisions.
• Accounting equation is a rule under which Assets = Liabilities + Equity. This rule holds true at all times because of the double-entry accounting system. Also called basic accounting equation or balance sheet equation.
• Accounts payable represent amounts that the company owes to its suppliers (vendors) for goods purchased or services received on credit. Accounts payable are a current liability.
• Accounts receivable refer to amounts of future cash receipts that are due from customers (i.e., amounts to be collected in the future). Accounts receivable are shown on the asset side of the balance sheet.
• Accrued expenses are expenses incurred but not yet paid in cash. When recorded, such expenses are usually shown in the liabilities section of the balance sheet.
• Accrued revenue is revenue earned but not yet received. When recorded, such amounts are usually shown as interest receivable in the balance sheet and interest revenue in the income statement.
• Accumulated depreciation represents an estimated cost of an asset used in operations. Accumulated depreciation is a cumulative of all depreciation expenses recognized for a particular asset. Accumulated depreciation is an example of a contra asset account. This account is included in the balance sheet under related asset accounts.
• Adjusting entries adjust the account balances before the final financial statements are prepared. Each adjusting entry affects one balance sheet account and one income statement account.
• Asset source transactions result in an increase in an asset account and in one of the claim accounts (liability or equity accounts).
• Asset use transactions result in a decrease in an asset account and in one of the claim accounts (liability or equity accounts).
• Assets are economic recourses of a business used to accomplish its main goal, i.e. increase owners' wealth.
• Avolidable fixed costs are costs that are not required to be incurred.
• Balance sheet presents assets, liabilities and owner's equity at a specific date. A balance sheet is also called Statement of Financial Position.
• Bank reconciliations compare bank records (from bank statements) with the company's general ledger (cash accounts). In this case an external source (bank statements) is used in preparing reconciliations. Bank reconciliations assist in ensuring that the company's records (general ledger cash account, etc.) and the bank records are complete and correct.
• Book value (also called carrying value) is the result of asset and related contra asset accounts offset. In other words, book value is the difference between an asset account (i.e. cost) and corresponding contra asset account (e.g. accumulated depreciation).
Accounting is a process of accumulating, summarizing and communicating financial information. Financial information can be of different types and serve different purposes,but it all comes from the same function – accounting.
Accounting is a service-based profession that provides reliable and relevant financial information useful in making decisions.
Financial information may include sales, expenses, taxes and other figures.
So, how exactly is this information prepared? There are several steps involved.
These steps are identification, recording and communication.
First, economic events are identified. A sale at a gas station, payment of taxes by a commercial enterprise, or purchase of insurance are all examples of economic events.
Second, all economic events are recorded. Recording is done to provide a history of a company's financial activities. In this step economic events are also classified and summarized.
Third, information about classified and summarized economic events is communicated to interested parties. Such communication may take several forms. One of them is financial statements about which we will talk later in this chapter.
Types of Accounting
Accounting provides information to several groups of people and for different purposes.
As a result, there are several kinds of accounting:
Financial accounting provides information to external users. Such external users can be investors, creditors, banks, regulatory bodies (i.e., Securities and Exchange
Commission, Internal Revenue Service, etc.). The information is usually in the form of financial statements (see more on the financial statements below). Managerial accounting provides information to internal users. Such internal users include a company’s managers and employees. The information accumulated and presented by managerial accounting function includes sales figures, gross margin analysis, cost information broken down by product line, etc.
As a rule, managerial accounting information provides more detail than the
financial accounting information and sometimes includes confidential data not
available to external users.
Tax accounting can be distinguished as another kind. Tax accounting deals mainly with calculation of taxes (i.e., income taxes, sales and use taxes, etc.). Because rules regulating calculation of taxes are different from those governing financial statements preparation and presentation, tax accounting should be performed separately and in parallel to financial and managerial accounting. Usually, there is a tax department with a company that deals with tax accounting, but works closely with the financial accounting department.
• Account is a record within an accounting system which is used to collect and store similar information for a specific asset, liability, equity, revenue, or expense.
• Account balance is the difference between the debit and the credit side of a T account.
• Accounting is a service-based profession that provides reliable and relevant financial information useful in making decisions.
• Accounting equation is a rule under which Assets = Liabilities + Equity. This rule holds true at all times because of the double-entry accounting system. Also called basic accounting equation or balance sheet equation.
• Accounts payable represent amounts that the company owes to its suppliers (vendors) for goods purchased or services received on credit. Accounts payable are a current liability.
• Accounts receivable refer to amounts of future cash receipts that are due from customers (i.e., amounts to be collected in the future). Accounts receivable are shown on the asset side of the balance sheet.
• Accrued expenses are expenses incurred but not yet paid in cash. When recorded, such expenses are usually shown in the liabilities section of the balance sheet.
• Accrued revenue is revenue earned but not yet received. When recorded, such amounts are usually shown as interest receivable in the balance sheet and interest revenue in the income statement.
• Accumulated depreciation represents an estimated cost of an asset used in operations. Accumulated depreciation is a cumulative of all depreciation expenses recognized for a particular asset. Accumulated depreciation is an example of a contra asset account. This account is included in the balance sheet under related asset accounts.
• Adjusting entries adjust the account balances before the final financial statements are prepared. Each adjusting entry affects one balance sheet account and one income statement account.
• Asset source transactions result in an increase in an asset account and in one of the claim accounts (liability or equity accounts).
• Asset use transactions result in a decrease in an asset account and in one of the claim accounts (liability or equity accounts).
• Assets are economic recourses of a business used to accomplish its main goal, i.e. increase owners' wealth.
• Avolidable fixed costs are costs that are not required to be incurred.
• Balance sheet presents assets, liabilities and owner's equity at a specific date. A balance sheet is also called Statement of Financial Position.
• Bank reconciliations compare bank records (from bank statements) with the company's general ledger (cash accounts). In this case an external source (bank statements) is used in preparing reconciliations. Bank reconciliations assist in ensuring that the company's records (general ledger cash account, etc.) and the bank records are complete and correct.
• Book value (also called carrying value) is the result of asset and related contra asset accounts offset. In other words, book value is the difference between an asset account (i.e. cost) and corresponding contra asset account (e.g. accumulated depreciation).
