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Summary of Accounting: What the numbers mean 10th Edition
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Accounting: What the numbers mean 10th editionChapter 1 Accounting present and past
What is accounting?
Accounting: the process of identifying, measuring, and communicating economic information about
an organization for the purpose of making decisions and informed judgment.
Financial accounting
Financial accounting: accounting that focuses on reporting an entity’s financial position at a point in
time and/or results of operations and cash flows for a period of time.
Generally refers to the process that results in the preparation and reporting of financial statements for
an entity.
Financial accounting is primarily oriented toward the external user.
Financial accounting is also primarily concerned with the historical results of an entity’s performance
Cash flow: cash receipts or disbursements of an entity.
Bookkeeping: procedures that are used to keep track of financial transactions and accumulate the
results of an entity’s financial activities.
Controller: the job title of the person who is the chief accounting officer of an organization. The
controller is usually responsible for both the financial and managerial accounting functions.
Sometimes referred to as comptroller.
Managerial accounting/ cost accounting
Managerial accounting: accounting that is concerned with the internal 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: a subset of managerial accounting that relates to the determination and
accumulation of products, process, or service costs.
Managerial accounting and cost accounting have primarily an internal orientation.
Many of the same data used in or generated by the financial accounting process are used in managerial
and cost accounting, but the data are likely to be used in a future-oriented way.
Auditing-public accounting
Auditing: the process of examining the financial statements of an entity by an independent third party
with the objective of expressing an opinion about the fairness of the presentation of the entity’s
financial position, results of operations, changes in financial position, and cash flows. The practise of
auditing is less precisely referred to as public accounting.
Public accounting: the segment of the accounting profession that provides auditing, income tax
accounting, and management consulting services to clients.
The result of an audit is the independent auditor’s report.
Independent auditor’s report: the report accompanying audited financial statements that explains
briefly the auditor’s responsibility and the extent of work performed. The report includes an opinion
about whether the information contained in the financial statements is presented fairly in accordance
with GAAP.
The report usually had four relatively brief paragraphs.
1. Identifies the financial statements that were audited, explains that the statements are the
responsibility of the company’s management and states that the auditor’s responsibility is to express
an opinion about the financial statements.
2. Explains that the audit was conducted “in accordance with the standards of the public company
accounting oversight board (U.S.)” and describes briefly what those standard require and what work is
involved in performing an audit.
Generally accepted auditing standards (GAAS)
3. contains the auditor’s opinion occasionally the opinion will be qualified with respect to fair
presentation, departure from generally accepted accounting principles, or the auditor’s inability to
perform certain auditing procedures.
, Generally accepted accounting principles (GAAP)
Annual report: a document distributed to shareholders and other interested parties that contains the
financial statements, notes to the financial statements, and management’s discussion and analysis of
financial and operating factors that affected the firm together with the report of the external auditor’s
examination of the financial statements.
4. Makes reference to the auditor’s opinion about the effectiveness of the company’s internal control
over financial reporting.
Internal accounting
Organizations with many plant locations or activities involving many financial transactions employ
professional accountants to do internal auditing.
Internal auditing: the practise of auditing within a company by employees of the company.
Governmental and not-for-profit accounting
require the same accounting functions to be performed as do other accounting entities.
Most government units have their own networks.
Income tax accounting
Tax practitioners often develop specialties in the taxation of individuals, partnerships, corporations,
trusts and estates, or international tax law issues.
How was accounting developed?
Accounting was developed over time in response to the needs of users of financial statements for
financial information to support decisions and informed judgments.
Ethics and the accounting profession
Integrity: the personal characteristic of honesty, including being forthright in dealings and
communications with others.
Objectivity: the personal characteristic of impartiality, including freedom form conflict of interest.
Independence: the personal characteristic of an accountant, especially an auditor, that refers to both
appearing and in fact being objective an impartial.
Competent: having the knowledge and professional skills to adequately perform the work assigned.
The conceptual framework
New users of financial statement can benefit from an overview of these concepts because they provide
the foundation for understanding financial accounting reports.
1. Accounting relates to individual entities.
2. Primarily aimed at meeting needs of external users who would otherwise not have access to the
firm’s records.
3. Relevant for making rational investment and credit decisions and other informed judgments.
4. Historical scorekeeping, not future-oriented.
5. Benefits of reporting should exceed costs.
6. Primary objective is to provide timely information about a firm’s earnings and cash flows.
7. Based upon accrual accounting.
Accrual accounting: accounting that recognizes revenues and expenses as they occur, even though
the cash receipt from the revenue or the cash disbursement related to the expense may occur before or
after the event that causes revenue of expense recognition.
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