Contents
What Is Accounting?
Basic Accounting Concepts
Basic Accounting Statements
Assets
Liabilities
Owners’ Equity
Income and Expenses
Basic Accounting Decisions
Managerial Accounting
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- Understand accounting standards and the double-entry general ledger system
- Navigate the balance sheet, income statement, and cash flow statement
- Tackle major accounting decisions and key issues in managerial accounting
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What Is Accounting?
Financial accounting is the process of recording, organizing, and interpreting financial transaction and performance information about a company. Financial reporting is an
extension of financial accounting in that it utilizes information from a company’s accounting records to provide accurate and relevant financial information in a comprehensible format to internal company decision makers, external analysts, and others with a stake in the company.
The Accounting Profession and Standards
Public accountants provide audit, tax, and financial services
to clients, whereas private accountants work internally for individual companies. Certified public accountants (CPAs) are licensed by state accounting boards to analyze and attest to the accuracy of third-party clients’ financial statements. The CPA certification is awarded based on higher-education requirements, a state certification exam, and a certain level of professional accounting experience.
- Financial Accounting Standards Board (FASB): U.S. accounting standards are set by private entities with the government overseeing the process. The FASB, is authorized by the Securities and Exchange Commission (SEC) to create and modify these standards.
- Generally Accepted Accounting Principles (GAAP): These are the collection of accounting principles set by the FASB. The principles are “generally accepted” because they do not have the force of law but are commonly accepted as the guidelines of the profession.
- Public Company Accounting Oversight Board (PCAOB): Created by the 2002 Sarbanes-Oxley Act in response to the Enron scandal, the PCAOB oversees auditors of public companies. Its standards are more stringent than those of the FASB.
Accounting Objectives
To yield useful and understandable information for investors and other users of financial statements, accounting information must achieve certain objectives.
- Reliability: Investors seek information that is reasonably free of errors and material omissions. Information is considered reliable if it can be verified or checked for correctness and if it is felt to be unbiased.
- Relevance: Accounting information is relevant to investors if it has the capacity to influence an investor’s decision-making process. To achieve this objective, the accounting information must be timely and provide predictive or feedback value.
- Comparability and consistency: The comparability and consistency of financial information go hand in hand. To be comparable, accounting information must be presented in a way such that users can identify similarities and variances by comparing financial information presented in a similar manner from year to year and from company to company.
Constraints
The ability of accounting information to achieve these objectives must be tempered by the following constraints.
- Materiality: Absolute accuracy is not imperative for accounting, as pennies (small amounts) are not important in an investor’s decision-making process. Materiality is the significance of an error or omission that would likely make a difference in the decision-making process of a reasonable person relying on the accounting data. Accountants should strive for accuracy to the extent that this pursuit yields a material improvement in the accuracy and completeness of the data. The materiality threshold must be determined for each specific situation, based on the significance of the item to the outcome or presentation of the financial information or transaction in question.
- Cost-benefit decision: The pursuit of accurate and complete accounting information should continue only as long as the benefit obtained from seeking further refinements exceeds the cost of pursuing those accuracies.
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