Chapter One Accounting and the Business Environment

Accounting Definition: Accounting is an information system that: (1)Processes data into information. (2)Measures business activities. (3)Communicates the results to decision makers. Accounting is the Language of Business. The better the one understand the language of business, the better he can manage the business. A key product of accounting is a set of reports called "financial statements. These financial statements include: 1. Income Statement (IS) 2. Statement of Owners (Shareholders) Equity (SHE) 3. Balance Sheet (BS) 4. Statement of Cash Flow (CF) 5. Notes Decision Makers: The users of Accounting Information 1. Individuals 3. Investors 5. Taxing Authorities Major Fields in accounting Accounting can be divided into two fields: 2. Businesses 4. Creditors 6. Others

Financial Accounting

Management Accounting

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Financial Accounting Financial Accounting provides information for external decisions makers, such as investors, creditors, and taxing authorities. Management Accounting Management Accounting provides information for internal decisions makers, such as mangers. Governing Organizations In the United States the financial Accounting Standard Board (FASB) formulates accounting standards. These standards are called Generally Accepted Accounting Principles (GAAP). GAAP govern financial information. Types of Business Organizations There are four organizations: types of business how accountants measure, process, and communicate

Proprietorship

Partnership

Corporations

Limited Liability Partners/companies

Note that: A limited-liability partnership is one in which each partner is liable only for his or her own actions and those under his or her responsibility. In a limited-liability company the business, not the members, is liable for the companys debts.

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Comparison of the four forms of business organization Point of Comparison Limited-liability Partners/Companies

Proprietorship

Partnership

Corporation

Owner

One Owner

Two or more Owners

Many Owners

Members

Life of the Organization

Limited by owner or partners choice or death

Indefinite

Personally Liability

Owner is personall y liable

Partners are personally liable

Shareholders are not personally liable By Board of Director Members are not personally liable

Management

By Owner

By Partners

By Members

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