1.5 Study & Review

Describe the purpose of accounting, and explain its role in business and society.

  • Accounting is a service activity designed to accumulate, measure, and communicate financial information about businesses and other organizations.

  • Accounting provides information for making informed decisions about how to best use available resources.

  • Accounting is often called the “language of business.”

Identify the primary users of accounting information.

 Managerial Accounting Financial Accounting
Focus Internal reporting External reporting
Reports Budgets, cost analyses, performance reports Balance sheet, income statement, statement of cash flows
Users Company management Investors, creditors, suppliers, customers, employees, competitors, the government, the press

Describe the environment of accounting, including the effects of generally accepted accounting principles, international business, ethical considerations, and technology.

  • Generally accepted accounting principles (GAAP)

    • Set by the FASB in the United States

    • Set by the IASB worldwide

  • Other U.S. organizations important to the practice of accounting:

    • SEC—regulates U.S. stock exchanges and requires financial disclosures by companies listed on those exchanges

    • AICPA—national association of professional accountants in the United States

    • IRS—government agency responsible for tax accounting rules

  • Do accountants need ethics?

    • Yes, because they are called on to make accounting judgments and estimates that impact the reported performance of a company.

  • Do accountants use computers?

    • Yes, computers have changed the way accounting information is collected, analyzed, and used. However, computers have not replaced the accountant nor eliminated the need for qualified decision makers.

Analyze the reasons for studying accounting.

  • Everyone is affected by accounting.

  • Each individual needs some accounting skills in order to organize his or her personal finances.

  • Each person in a business, charity, or other organization can use accounting information to make better decisions.

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