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Overview of Accounting

Nikunj Patel
Assistant Professor
Institute of Management,
Nirma University,
Ahmedabad

Why important for students


1.
2.
3.

4.

Constructing and reading financial statements


Working life (May be working or an entrepreneur)
The wake of a growing number of high-profile
accounting failures (such as Waste Management Scandal
(1998) - Reported $1.7 billion in fake earnings, Enron
(2001) - Shareholders lost $74 billion, WorldCom (2002)
- Inflated assets by as much as $11 billion, leading to
30,000 lost jobs and $180 billion in losses for investors,
and so on)*
As a manager or entrepreneur, it will help you to take
decisions

For more details - http://www.accounting-degree.org/scandals


Enron Movie : The Smartest Guys in the Room (2005) www.youtube.com/watch?v=pRWXW87YrlM

Creative Accounting

Definition of Accounting
In 1941 AICPA (American Institute of

Certified Public Accountants) defined


accounting as the art of recording,
classifying, and summarizing in a
significant manner and in terms of
money, transactions and events which
are in apart at least, of financial
character, and interpreting the results
thereof.

Definition of Accounting
In 1966, AAA (American Accounting

Association) defined the process of


identifying, measuring and
communicating economic information
to permit informed judgments and
decisions by users of information.

Accounting has 3 main activities


1. Identifying
select events that are evidence of economic activity

2. Recording or measuring
provide a chronological diary of measured events in an
orderly & systematic manner

3. Communicating
preparation & distribution of accounting reports and
financial statements; as well as analyzing and interpreting
data

Accounting Activities
1. Identifying
Business
Activities

Recording
Business
Activities
Communicating
Business Activities

The Need for Accounting


Managers, investors, and other internal groups
want the answers to two important questions:
How well did
the organization
perform?

Where does
the organization
stand?

The Need for Accounting


Accountants answer these questions
with three major financial statements:
Income
statement

Balance
sheet
Statement of
cash flows

Accountants in Organizations
Bookkeepers and other data entry personnel.
Maintain detailed operating records.

Staff accountants.
Prepare and interpret reports.
Design and operate information systems.
Ensure accuracy of information.

What Accounting Does?


Accounting is a system that provides
information on:
Amounts of resources.
How resources were financed.
Results achieved by using resources.

For either:

Parties inside or outside of organization.


Profit and nonprofit organizations.

Categories of Accounting Information

Operating
Financial accounting
Management accounting
Tax accounting

Operating Information
Needed to conduct day-to-day activities.
Largest quantity of accounting data.
Examples:

Hours worked by employees.


Inventory on hand.
Amounts owed by customers.
Amount of money in bank.

Financial Accounting Information


Internal Users

External Users

Lenders

Consumer Groups

Managers

Sales Staff

Shareholders External Auditors

Officers

Budget Officers

Governments Customers

Internal Auditors Controllers

Financial Accounting Information


External Users

Financial accounting
provides external users
with financial statements.

Internal Users

Managerial accounting
provides information
needs for internal decision
makers.

Users of Accounting Information


Lenders: Whether the firm (borrower) can repay the

money?
Shareholders: whether to buy, hold, or sell stocks?
Governments: whether the firm pay all due tax?
Customers: whether the firm can exist to provide postsales services?
External Auditors: whether the financial statements are
prepared according to GAAP?
Etc.

Users of Accounting Information


Marketing managers: target customers, set

price, monitor sales.


Production managers: monitor cost and
ensure quality.
Purchasing managers: what, when and where
to purchase materials.
Human resource managers: employees
performance and compensation.

Management Accounting Information

For internal users such as president, marketing


manager, production manager, etc.

Used for three management functions:

Planning.

Implementation.

Control.

Planning
Deciding what actions should be taken.
Decision making involves:
1.
2.
3.
4.
5.

Identify problem or opportunity.


Specify and rank criteria.
Identify alternatives.
Analyze alternatives.
Compare alternatives and select best.

Budgeting
Process of planning for a specified time, often for one
year.
Objective is to coordinate plans to provide consistency

Implementation
Actions to provide human and other resources to
achieve planned results.
Requires supervision by managers.
Must change plans as conditions require.

Control
Process to ensure employees perform
properly.
Accounting information is used to:
Communicate plans and expected actions.
Motivate employees to act consistently with
organizations goals.
Focus attention on problem areas (via
feedback).
Appraise performance of managers and other
employees.

Tax Accounting Information


Prepare returns for taxing authorities:

Central Government
State Government
Local Municipal
International

Tax accounting rules can differ from financial


accounting rules.

Role of Controller
Top accounting manager.
Oversees:
Accounting professionals in areas of
management accounting, financial
accounting, and tax accounting.
Requests for information and reports.
Compliance with applicable rules and
regulations.
Design, installation, and operation of
information systems.

Approaches to Study Accounting


Viewpoint of accountant (preparer).
Collecting, summarizing and reporting
accounting information.

Viewpoint of user.

Understanding, analyzing, and interpreting


accounting reports to make decisions.

Misconceptions about Accounting


Actual value or worth of a business may not be
included in usual financial reports.
Not all resources (assets) of organizations are (or
can be) measured and reported.
e.g., knowledge and skills of employees.

Accounting: The Language of Business


But like any language:
Many words have similar, but not same,
meaning.
Some rules are definite others are not.
Rules continue to evolve.
Differing presentations.

XBRL (extensible business reporting


language).
Helps adjust for presentational differences.