Understanding Accounting: Definition, Users, Financial vs. Managerial, and Equation, Lecture notes of Accounting

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CHP 1

Accounting and the

Business Environment

DR. ALİ ATİLLA PEREK

PURPOSE OF THIS WEEK’S LESSON

¢ Purpose of this week’s lesson is; — understand accounting and the business environment, — define accounting, — figure out products of accounting, — list the users of accounting information and their purpose, — compare financial and managerial accounting — understand business types and organizational forms and — learn and apply the accounting equation DR. ALI ATILLA PEREK

DEFINITION OF ACCOUNTING

¢ Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof." DR. ALI ATILLA PEREK

1.1 DEFINITION OF ACCOUNTING

¢ Accounting is a system that provides information on: — Amounts of resources. — How resources were financed. — Results achieved by using resources. DR. ALİ ATİLLA PEREK

Accounting Informatio n The Accounting Process Decision Makers Economi c Activitie s Actions (decisions) Accounting links decision makers with economic activities ¾ and with the results of their decisions. Reported Results of Actions DR. A (decisions) Lİ ATİLLA PEREK

1.3 THE USERS OF ACCOUNTING

INFORMATION

¢ The parties who are interested in the accounting information are mainly, — Management — Workers, employees — Shareholders, investors — Creditors, financial institutions — Government — Competitors — Suppliers — Customers DR. ALİ ATİLLA PEREK

1.3 THE USERS OF ACCOUNTING

INFORMATION

¢ Creditors, financial institutions; — Creditors, financial institutions need accounting information to determine whether their loans and the interest attached to them, will be paid when due. ¢ Government; — Government and regulatory agencies are interested in resource allocation and, therefore want to know about the activities of enterprises. Also use accounting information in decision to stimulate the economy, and to determine taxation policies and assessments. And use some or all the information in the calculation of national economic statistics. DR. ALİ ATİLLA PEREK

1.4 FINANCIAL ACCOUNTING AND

MANAGEMENT ACCOUNTING

FINANCIAL

¢Provides

information for

external users:

— Investors

— Bankers

— Government

agencies

MANAGEMENT

¢Provides

information for

internal users:

— Managers of the

company

DR. ALİ ATİLLA PEREK

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1.5.1 OPERATING INFORMATION

¢ Needed to conduct day-to-day activities. ¢ Largest quantity of accounting data. — Examples: ¢ Hours worked by employees for payroll purposes. ¢ Automobiles available for sale to customers. ¢ Amounts owed by customers. ¢ Parts and accessories on hand. DR. ALİ ATİLLA PEREK

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1.5.2 FINANCIAL ACCOUNTING

INFORMATION

¢ For external users (investors) and

managers.

¢ Used by investors to make decisions to

buy, sell or hold shares of company.

¢ Primary financial statements:

— Balance sheet. — Income statement. — Statement of cash flows.

¢ Common rules used so investors can

compare with other companies’ financial

statements.

DR. ALİ ATİLLA PEREK

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1.5.3 PLANNING

¢ Deciding what actions should be taken.

Decision making involves:

— Identify problem or opportunity. — Specify and rank criteria. — Identify alternatives. — Use accounting and other information to analyze. — Compare alternatives and select best.

¢ Budgeting = process of planning for a

specified time, often for one year.

DR. ALİ ATİLLA PEREK

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IMPLEMENTATION

¢ Actions to provide human and other resources to achieve planned results. ¢ Requires supervision of managers. ¢ Managers must change plans as conditions require. DR. ALİ ATİLLA PEREK

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1.5.4 TAX ACCOUNTING INFORMATION

¢ Preparation of state, and other taxes. ¢ Tax accounting rules can differ from financial accounting rules. DR. ALİ ATİLLA PEREK

1.6 BUSINESS TYPES AND

ORGANIZATIONAL FORMS

¢ Business Types ¢ Service companies do not make or sell goods; instead, they provide a service to customers or clients. ¢ Manufacturers make products from raw inputs. ¢ Merchandisers sell the goods that manufacturers produced. Merchandisers that sell exclusively to other businesses are called wholesalers , while those that sell to customers are called retailers. DR. ALİ ATİLLA PEREK