what is accounting all about overview and concepts

What is accounting all about

Overview and concepts

2007/01/15 International Business ProgramFinancial Accounting

2

What is it?

• Documentation or communication?


3

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!


4

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


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?


6

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


7

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


8

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)


9

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)


10

Forms of Business

• Sole proprietorship• Partnership

(but beware because many ‘partnerships’ are corporations)

• Corporation-most common– Separate from owners– Limited liability

• Group – most important


11

Forms of Business

• Group – most important– Combinations of corporations

– Essentially one business

– Several reasons (see textbook)

– Sometimes required• Tax purposes• Operate in different countries


12

Objectives of Enterprises

• Create value

• Various stakeholders– Shareholders

– Employees

– Supply chain

– National, supra-national, world economy

– Society as a whole


13

Purpose of Enterprises

• ?


14

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


15

Users of Accounting Information

• See list in textbook. E.g.– Owners (investors)

– Employers

– Lenders

– Supply chain

– INFORMATION INTERMEDIARIES• E.g. Financial analysts


16

Users of Accounting Information

• In this class interest is in EXTERNAL users

• Management obviously has an interest

• Separate area called management accounting (see text)


17

Key accounting concepts

• Accounting serves markets

• Information intermediaries analyze information for markets

• Markets are global

• Accounting must be global

• IASB and IFRS


18

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


19

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


20

Assumptions and principles

• Covered in text; highlights here

• Accrual basis– Based on economic event

– Not necessarily cash

• Going concern– Exist for foreseeable future


21

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


22

Qualitative Characteristics

• Read from text; highlights here–Understandable to informed user

• Focus on information intermediaries

–Comparable• Over time – most important

• Other entities – less important


23

Qualitative Characteristics (Continued)

• Read from text; highlights here–Relevance – make a difference

–Materiality – can influence decisions


24

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!


25

Other Characteristics

• Constraints

• Hierarchy(See textbook discussion for both)

what is accounting all about overview and concepts

Documents

historical accounting

culture accounting

accounting scheme

business enterprise

important slide

forms of business group

universal slide

historical northern