1.1 The Role of Accounting in Business

Business is the general term applied to the activities involved in the production and distribution of goods and services. Accounting is used to record and report the financial effects of business activities. It provides the means of recording and communicating the successes and failures of business organizations.

All business entities have some common activities. One common activity is the acquisition of economic resources. These resources, often referred to as “capital”, come from three sources:（1）investors（owners）,（2）creditors（lenders）, and（3）the business itself in the form of earnings that have been retained. Once resources are obtained, they are used to buy land, buildings, and equipments, to purchase materials and supplies, to pay employees, and to meet other operating expenses involved in the production and marketing of goods or services. When goods or services are sold, additional economic resources are generated. These resources can be used to pay loans, to pay taxes, and to buy new materials, equipments, and other items needed to continue the operations of the business.

Accountants measure and communicate the results of these activities. In order to measure these results as accurately as possible, accountants follow a fairly standard set of procedures, usually referred to as the accounting cycle. The cycle includes several steps, which involve analyzing, classifying,recording, posting, closing, and reporting the transactions of a business. These steps will be explained in detail in the following chapters.

1.1.1 The Nature and Function of Accounting

Accounting information: uses and users.

How do stockholders get information about the financing, investing, and operating activities of a business? The role of accounting is to provide this information. Accounting provides data for managers to operate the business and for other stockholders to assess the performance and financial position of the business.

Accounting is formally defined as a system for providing “quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”

However, many concepts in this chapter also apply to individuals, governments, and other types of organizations. For example, individuals must account for activities such as hours worked, checks written, and bills due. Stockholders for individuals include creditors, dependents, and the government.A main interest of the government is making sure that individuals pay their proper taxes.

Who makes these decisions and informed judgments? Users of accounting information include managers of the entity or organization, owners of the organization, potential investors and creditors of the organization, employees, and various federal, state, and local governmental agencies that are concerned with regulatory and tax matters. The following illustrates some of the users and uses of accounting information.

（1）Managers: When planning, directing, and controlling, managers make many decisions and informed judgments. For example, when considering the expansion of a product line, planning involves identifying and measuring costs and benefits, directing involves communicating the strategies selected,and controlling involves identifying, measuring, and communicating the results of the product line expansion during and after its implementation.

（2）Investors: When considering whether or not to invest a company, investors use accounting information to assess the amounts, timing, and uncertainty of future cash returns on their investment.

（3）Creditors: When determining how much money they lend a customer before receiving payment,creditors assess the probability of collection and the risks of late（or non-）payment.

（4）Employees: When planning for retirement, employees assess the company's ability to offer long-term job prospects and an attractive retirement benefits package.

（5）SEC（Securities and Exchange Commission）: When reviewing for compliance with SEC regulations, analysts determine whether to disclose all required information to investors or not.

（6）Taxing authorities State, territory and federal governments: Levy taxes on individuals and businesses. Income tax is calculated using accounting information. Business determine their goods and services tax from accounting records that show hhow much they have purchased an sold.

（7）Non-profit organizations: Non-profit organisations-such as hospitals, government agencies and universities, which operate for purposes other than profit-use accounting information in much the same way that profit-oriented businesses do.

（8）Other users Employees and labour unions: Other users Employees and labour unions make wage demands based on their employer's repprted profit. Consumer groups and the feneral public are also interested in the amount of profit businesses earn. Newspapeis report ‘improved profit pictures’ of companies as the nation emerges from ecomomic downturns. Such news, based on accounting information, is related to perceptions of our standared of living.

1.1.2 The Division of Accounting

Users of accounting information are a diverse group. They may be categorized as external users or internal users. This distinction allows us to classigy accouting into tow fields-financial accounting and management accounting.

1. Financial Accounting

Financial accounting focuses on information for people outside the firm. Creditors and outside investors, for example, are not part of the day-to-day management of a business. Likewise, government agencies and the general publid are external users of a firm's accounting information.

Financial accounting is primarily externally oriented. The financial statements are directed to individuals who are not in a position to be aware of the day-to-day financial and operating activities of the entity. Financial accounting is also primarily concerned with the historical results of an entity's performance. Many corporate annual reports make reference to the historical nature of financial accounting information to emphasize its importance to users.

Bookkeeping procedures are used to accumulate the results of many of an entity's activities, and these procedures are part of the financial accounting process. Bookkeeping procedures have been thoroughly systematized using manual, mechanical, and computer techniques, and although these procedures support the financial accounting process, they are only a part of the process.

Financial accounting is done by accounting professionals who have generally earned a Bachelor of Science degree with a major in accounting. The financial accountant is employed by an entity to use her or his expertise, analytical skills, and judgment in the many activities that are necessary for the preparation of financial statements. The title controller is used to designate the chief accounting officer of a corporation. The controller is usually responsible for both the financial and managerial accounting functions of the organization.

2. Managerial Accounting

Managerial accounting is concerned with the use of economic and financial information to plan and control many of the activities of an entity and to support the management decision-making process.Cost accounting is a subset of managerial accounting that relates to the determination and accumulation of product, process, or service costs. Managerial accounting and cost accounting have a primarily internal orientation, as opposed to the primarily external orientation of financial accounting. Much of the same data used in or generated by the financial accounting process are used in managerial and cost accounting, but the data are more likely to be used in a future-oriented way, such as in the planning of budgets.

Governmental and not-for-profit accounting: Governmental units at the municipal, state, and federal level and not-for-profit entities such as colleges and universities, hospitals, and voluntary health and welfare organizations require the same accounting functions to be performed as do other accounting entities. Religious organizations, labor unions, trade associations, performing arts organizations, political parties, libraries, museums, country clubs, and many other not-for-profit organizations employ accountants with similar educational qualifications as those employed in business and public accounting.

Income tax accounting: The growing complexity of federal, state, municipal, and foreign income tax laws has led to a demand for professional accountants who are specialists in various aspects of taxation. Tax practitioners often develop specialties in the taxation of individuals, partnerships,corporations, or trusts and estates, or in international tax law issues. These accountants work for corporations, public accounting firms, governmental units, and other entities. Many tax accountants have a bachelor's degree and are CPAs; some are attorneys as well.