1.1 Nature and Content of Accounting

1.1.1 Business Environment

Most organizations engage in some forms of economic activities.Some of them exist as not-for-profits.These groups may provide services or goods to others but seek to do so without the underlying goal of generating profits.Most of organizations are businesses.They attempt to earn a return over the cost of providing services or goods that satisfy the needs or wants of others.Businesses are typically categorized into three broad groups:service,manufacturing,and merchandising companies.Businesses operate in many different legal forms according to different jurisdictions.Generally,there are three legal forms of businesses:sole proprietorships,partnerships,and corporations. Nearly all organizations use accounting to generate information about their economic activities.This book focuses on business organizations.

1.1.2 Nature and Role of Accounting

First and foremost,accounting is a service activity. “Its function is to provide quantitative information,primarily financial in nature,about economic entities that is intended to be useful in making economic decisions—in making reasoned choices among alternative courses of action.”[1]Thus,accounting is a means to assist a wide variety of parties in making economic decisions. Sound decisions,based on reliable information,are essential for the efficient distribution and use of the scarce economic resources. Accounting,therefore,plays an important role in our economic and social system.

1.1.3 Users and Accounting Information

In general,users(decision-makers)of accounting information are divided into two major categories:internal and external.

The major internal users are management and directors of the business enterprise. Internal users need information to assist in planning and controlling enterprise operations and managing enterprise resources. The accounting system must provide timely information needed to control day-to-day operations and to make major planning decisions,such as:Do we make this product or another one?Do we build a new production plant or expand existing facilities?Managerial accounting(sometimes referred to as management accounting)is concerned primarily with financial reporting for internal users.

External users include both individuals who have or intend to have a direct economic interest in a business and those who have an indirect interest because they advise or represent those individuals with a direct interest. These users include present and potential investors and creditors,suppliers[2],customers,financial analysts and advisors,regulatory authorities,the public,etc. Investorsuse accounting information to make decisions to buy,hold,or sell ownership shares of a company.Creditors,such as suppliers and bankers,use accounting information to evaluate the risks of granting credit or lending money. Financial accounting emphasizes these users' needs.

1.1.4 Fields of Accounting

1.Financial Accounting

Financial accounting is the preparation and presentation of financial reports for users who are not involved in the day-to-day operations of an organization.The information is distributed primarily through general purpose financial statements which suit the decision-making needs of a range of users.However,many companies issue their financial statements only after an audit by independent CPAs.Audit is a thorough check of an organization's accounting systems and records;it is performed to add credibility to the financial statements prepared by an organization's own accountants.The objective of audit is to decide whether the statements reflect the company's financial position and the operating results agree with generally accepted accounting principles(GAAP).

2.Managerial Accounting

Managerial accounting involves several activities providing information to managers. Cost accounting is a process of accumulating the information managers need about operating costs and is useful for evaluating each manager's performance.Cost accounting may involve accounting for the costs of products,services,or specific activities. Budgeting is the process of developing formal plans for an organization's future activities.After the budget has been adopted,it provides a basis for evaluating actual performance.

1.1.5 Accounting Process

Accounting process is“identifying,measuring,recording,and communicating economic information to permit informed judgments and decisions by users of information.”[3]The first component of the process is identifying information relevant to business decision-making.Only business transactions will be recognized by the accounting system.A business transaction is an event which affects the financial position of an entity and can be reliably measured and recorded.Events such as increases in interest rates which will not immediately affect an entity's financial position will not be categorized as business transactions.

The second component is the measuring of information,which refers to the analysis of business transactions and classifying of business transactions.This component identifies how transactions will affect an entity's position,groups together similar items such as expenses and income,and determining the monetary aspect of the transactions.

The third component is recording.The company records the economic events in order to provide a history of its financial activities.Recording consists of keeping a systematic,chronological diary of events.In recording,the company also classifies and summarizes economic events.

The final component is the communicating of relevant information through accounting reports.The most common of these reports are called financial statements,such as income statement and balance sheet[4],for decision-making purposes for the various users.