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Lesson1

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Lesson1

Uploaded by

Javier Martínez
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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LESSON 1

ACCOUNTING AS AN
INFORMATION SYSTEM

Outline

1. Business activity: companies.

2. Concept and classification of accounting.

3. Users of accounting information.

4. Requirements of accounting.

1
Chapter Learning Objectives

1. Become aware of the role that accounting plays


in decision making processes.

2. Understand the objectives and usefulness of


financial accounting.

3. Identify the main users of accounting


information.

1.1. Business activity: companies


Business environment
• Uncertainty

• Economic decisions
 Utility
 Cost
 Efficient
 Timeliness

• Actors in economic decisions


 Managers
 Investors
 Creditors 4

2
1.1. Business activity: companies
Business environment
• The need for (accounting) information.

• Accounting information must be USEFUL:


– Reliable (unbiased, fair)
– Relevant (timely, predictive ability)

• The need for accounting standards


– Compulsory
– Comparability

1.1. Business activity: companies


The accounting system: the flow of information

1. People make decisions

2. Business transactions occur

3. Businesses prepare reports to show the


results of their operations

3
1.1. Business activity: companies
Types of Business Organizations

• Proprietorships
• Partnerships
• Corporations

1.1. Business activity: companies


Proprietorship
• A business owned by one person.

• Owner is often the manager.

• Generally small in size:


– Retail or service-oriented companies: boutiques, restaurants,
shoe repair shops, butcher shops…
– Professional businesses: law or accounting office, hair styling
salon...

4
1.1. Business activity: companies
Partnership

• An agreement between two or more people to carry


on as co-owners of a business.

• Owners might also be managers.

• Small- to medium-sized organizations.

• Retail, service, manufacturing industries.

1.1. Business activity: companies


Corporation

• A separate legal entity with ownership evidenced by


transferable shares or stock.

• Professionally managed for “absentee” owners.

• Small or large organizations.

• Retail, service, or manufacturing activities.

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5
1.2. Concept and classification of Accounting.
American Institute of Certified Public Accountants (AICPA):

Accounting is a service activity. Its function is to provide


quantitative information, primarily financial in nature, about
economic entities, that is intended to be useful in making
economic decisions -in making reasoned choices among
alternative courses of action.

Statement of Accounting Principles, n.4, p. 8

www.aicpa.org

11

1.2. Concept and classification of Accounting.

• IDENTIFIES all events that affect the value or composition of


the company’s resources.

• ASSESSES THE VALUE of the elements affected by the


event.

• RECORDS business transactions and their impact on the


value of such elements.

• PROCESSES information to produce summary financial


statements that describe the financial position of the
economic entity.

• COMMUNICATES reports the results of business operations


to internal and external users to aid them in decision making
activities.
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6
1.2. Concept and classification of Accounting.
Financial Accounting
• Records past transactions
• Prepares compulsory financial statements
• Disclosure among external users
• Follows accounting principles and standards
• Places emphasis on reliability, comparability and
usefulness
• Is subject to verification (audit)

13

1.2. Concept and classification of Accounting.


Managerial Accounting
• Information used to make managerial decisions that
shape the future of the firm
• Management decides on the contents and format of
(cost statements) reports
• Management accounting data not disclosed by internal
users
• No principles or standards are to be followed
• Emphasis placed on timeliness, usefulness, simplicity,
representational faithfulness and, predictive ability
• Management accounting data is not subject to
verification (although internal audit is useful to ensure
usefulness)
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7
1.2. Concept and classification of Accounting.

The Link
• In order to prepare the financial statements of business
companies, managers must design and implement a
cost accounting system that allows them to calculate the
cost of inventory at the end of the year.

• The financial accounting system is unable to provide an


exact and reliable measure of the value of inventory.

• Therefore, a good Financial Accounting system requires


a suitable cost accounting system.

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1.3. Users of Accounting Information

INTERNAL USERS

• Members of the board of directors


• Company top executives
• Company managers
• Company non-management employees

16

8
1.3. Users of Accounting Information

EXTERNAL USERS

• Investors (current and prospective)


• Creditors
• Government/ regulatory agencies
• Taxing authorities
• News media
• Labor unions
• Business academics and students

17

1.3. Requirements of Accounting Information


Accounting must provide understandable and useful
information to the users in making economic decisions.

• Substance over form


• Relevance (useful for decision making)
– Timeliness (available in time)
– Reliability (free of errors or biases)
• Neutrality (unbiased)
– Integrity (comprehensive)
• Verifiable (auditing)
• Understandability
• Comparability (time series / across companies)
• Uniformity (criteria)
• Identification of the economic entity 18

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