What is accounting?
Accounting is the system that measures business activities, processes that information into reports, and communicates the results to decision makers. For this reason it is called “the language of business“. The better you understand the language,
the better you can manage the financial aspects of living. Personal financial planning, education expenses, loans, car payments, income taxes, and investments are based on the information system that we call accounting – also important for the environment
(illustration below). A key product of an accounting information system is that financial statements allow people to make informed business decisions. Financial statements are the documents that report an individual's or an organization's business in monetary amounts.
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Table of Contents
1 What is accounting?
2 Users of Accounting Information: Decision Makers
3 The Development of Accounting
4 The Accounting Profession
4.1 The Work of Accountants
4.2 Specialised Accounting Services
4.3 Accounting Organizations and Designations
5 Accounting Standards in the United States
5.1 Objective of Financial Reporting
5.2 Underlying Concepts
6 Accounting Principles
6.1 Generally
6.2 Constraints on accounting
7 Accounting Standards throughout the world
8 Sources
8.1 English Books
8.2 German Books
Target Objectives and Themes
This report provides a foundational overview of accounting practices, with a specific focus on the principles and standards governing financial reporting within the United States. It aims to clarify the role of accounting as the "language of business," define its primary users, and explain the institutional frameworks that ensure the reliability of financial information for decision-making purposes.
- The distinction between financial and management accounting
- The roles and influence of major accounting organizations like the FASB and AICPA
- Fundamental accounting concepts such as the Entity and Going-Concern principles
- Methodologies for revenue recognition and the matching of expenses
- The impact of international differences and globalization on accounting standards
Excerpt from the Book
Entity Concept
The entity concept is the most basic concept in accounting because it draws a boundary around the organization being accounted for. That is, the transaction of each entity are accounted for separately from transactions of all other organizations and persons, including the owners of the entity. This separation allows us to measure the performance and the financial position of each entity independent of all other entities.
A business entity may be a sole proprietorship (owned and operated by a single individual), a partnership of two or more persons, or a large corporation such as Exxon. The entity concept applies with equal force to all types and sizes organizations. The proprietor of a travel agency, for example, accounts for her personal transactions separately from those of her business. This division allows her to evaluate the success or failure of the travel agency. If she were to mix her personal and business accounting records, she would lose sight of the information needed to evaluate the business alone.
The entity concept also provides the basis for consolidating subentries into a single set of consolidated financial statements to the public.
Summary of Chapters
1 What is accounting?: This chapter defines accounting as the system used to measure, report, and communicate business activities to decision-makers.
2 Users of Accounting Information: Decision Makers: It categorizes the diverse groups that rely on accounting data, such as individuals, investors, creditors, and government agencies, to make informed economic decisions.
3 The Development of Accounting: This section outlines the historical evolution of accounting from ancient record-keeping to the modern corporate era and introduces the regulatory role of the FASB.
4 The Accounting Profession: It discusses the classifications of accountants, including private and public practice, and the importance of professional standards.
5 Accounting Standards in the United States: This chapter covers the rule-making power of the SEC and FASB and the conceptual framework guiding financial reporting.
6 Accounting Principles: It explains the foundational principles like reliability, comparability, cost, and revenue, as well as the practical constraints such as materiality and conservatism.
7 Accounting Standards throughout the world: This chapter highlights international differences in financial reporting and the move toward global standardization.
8 Sources: This provides a bibliographic list of English and German literature used for the report.
Keywords
Accounting, Financial Statements, FASB, GAAP, AICPA, Revenue Recognition, Matching Principle, Materiality, Conservatism, Auditing, Management Accounting, Financial Accounting, Entity Concept, Going-Concern, International Standards
Frequently Asked Questions
What is the primary purpose of this report?
The report serves as an overview of accounting systems, focusing specifically on the principles and standards used in the United States to communicate financial information to decision-makers.
Who are the main users of accounting information?
The information is used by a broad spectrum of people including internal management, stockholders, creditors, taxing authorities, and government regulatory agencies like the SEC.
What is the difference between financial and management accounting?
Financial accounting provides information to external parties (investors, creditors), whereas management accounting generates confidential information for internal decision-makers like executives and department heads.
Which organization is responsible for setting accounting standards in the U.S.?
The Financial Accounting Standards Board (FASB) is the primary body responsible for determining accounting practices, often working in conjunction with the SEC.
What are the fundamental constraints discussed in the text?
The report highlights the Materiality concept (focusing on significant information) and the Conservatism concept (which prioritizes prudent reporting to counter management optimism).
How does the report characterize "Accounting Principles"?
They are described as a set of generally accepted guidelines—different from natural laws—that draw their authority from acceptance by the business community to ensure consistency and reliability.
What is the "Going-Concern Concept" and why is it important?
It is the assumption that a business will continue to operate indefinitely. This is crucial because it justifies reporting assets and liabilities based on historical cost rather than liquidation value.
How do international differences affect accounting standards?
While basic systems like double-entry bookkeeping are universal, differences exist regarding tax reporting, inflation adjustments, and disclosure requirements, driving the need for international harmonization.
- Quote paper
- MMag. Philipp Kaufmann (Author), 1999, Accounting Standards and Principles in the US, Munich, GRIN Verlag, https://www.grin.com/document/4009
