Comprehensive Introduction to Accounting and Business Organizations

Definitions of Accounting

  • American Accounting Association (AAA) Definition: Accounting is defined as ‘‘A process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information.’’

  • Accounting Standards Council (ASC) Definition: Accounting is described as ‘‘A service activity. Its function is to provide quantitative information, primarily financial, about economic entities, intended to be useful in making economic decisions.’’

The Nature of Accounting

  • Accounting as a Science: It is considered a science because it represents a body of knowledge that has been systematically gathered, classified, and organized.

  • Accounting as a Practical Art: It is viewed as a practical art because it requires the application of creative skills and professional judgment.

  • Accounting as an Information System: It is recognized and characterized as a comprehensive database of information designed to serve various needs.

Types of Information Provided by Accounting

  • Quantitative Information: This refers to information that is expressed in numbers, quantities, or specific units.

  • Qualitative Information: This involves information that is expressed in words or in a descriptive form.

  • Financial Information: This is information expressed specifically in terms of money. Financial information is also categorized as quantitative information because monetary amounts are normally expressed in numerical form.

Functions of Accounting in Business

  • 1. Record Keeping Function: The primary role of accounting is to maintain a systematic, organized, and chronological record of all financial transactions occurring within the business.

  • 2. Protecting Properties: Accounting assists the company in designing an appropriate system of internal control to protect and safeguard the resources of the entity.

  • 3. Communicating Results: The financial position (status of assets, liabilities, and equity) and financial performance (profitability) must be reported to the ultimate users without any bias.

  • 4. Meeting Legal Requirements: The entity is legally obligated to keep and maintain accounting records for as long as necessary to comply with various government requirements and regulations.

Users of Accounting Information

  • Internal Users:

    • These are individuals who are part of the company and are responsible for making decisions that affect the day-to-day operations of the business.

    • They are provided with special purpose financial information tailored to their specific management needs.

  • External Users:

    • These are individuals or entities that have an interest in the firm but are not part of its internal management.

    • They are provided with general purpose financial information designed to aid their common needs, such as investment or credit decisions.

Branches of Accounting

  • 1. Financial Accounting: This branch involves the preparation and interpretation of financial statements primary for external users to assist in their decision-making process.

  • 2. Managerial Accounting: This involves the preparation of reports specifically for management (internal users) to aid in internal decision-making.

  • 3. Government Accounting: This branch is concerned with the administration and use of public funds for the community. It involves identifying the sources of funds and ensuring their use is consistent with government regulations.

  • 4. Auditing: This is divided into two distinct categories:

    • External Auditing: Deals with the independent verification and examination of accounting records to ensure accuracy and compliance.

    • Internal Auditing: The main function is to ensure that different units of the organization comply with the internal policies established by the company.

  • 5. Tax Accounting: This branch deals with the computation of tax liabilities, the preparation of tax returns, and providing consultancy regarding the tax consequences of business decisions.

  • 6. Cost Accounting: This involves the recording, classifying, and summarizing of detail related to materials, labor, and overhead costs necessary to produce and sell a product.

  • 7. Accounting Education: This involves accountants serving as educators in higher education settings, including colleges, graduate schools, and post-graduate institutions.

  • 8. Accounting Research: This branch deals with the creation and discovery of new knowledge in the fields of accounting, finance, or taxation.

Types of Business Organizations

  • Sole Proprietorship:

    • Definition: A business owned by a single person. The proprietor typically finances the firm using personal savings, bank loans, or government loans

  • Partnership:

    • Definition: An organization composed of two or more persons who agree to contribute money, property, or services with the goal of dividing the profits among themselves.

  • Corporation:

    • Definition: An artificial being created by operation of law, possessing the right of succession and various powers, attributes, and properties authorized by law or incident to its existence.

  • Cooperative:

    • Definition: A duly registered association of persons with a common bond of interest who have voluntarily joined together to achieve a lawful common social or economic end. Members make equitable contributions to the required capital and accept a fair share of the risks and benefits of the undertaking based on universally acceptable cooperative principles.