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Introduction to Accounting Lecture Notes

Accounting is the language of business. Everyone in business uses accounting in some

form or fashion.
Everyone in the business world needs to know enough about accounting to be able to
communicate with others in the industry.
Accounting is the process of analyzing, classifying, recording, summarizing, and
interpreting business transactions.
Business transactions are economic (ie. dollar) events that directly change the
companys financial condition or impact the results of its operations. Example: when the
business pays the utility bill a business transaction has occurred.
Accounting provides information to managers, owners, investors, government agencies,
and others both inside and outside the organization.
Many of these individuals are the decision makers of the company and they must have
the correct information to make sound business decisions.
Accountants are the individuals who maintain the financial history of the business

Accounting Standards

Standards or guidelines have been established for accounting records so that all business
accounting reports can be interpreted fairly and equally.
The guidelines are known as Generally Accepted Accounting Standards or GAAP.
GAAP are developed by the Financial Accounting Standards Board or FASB.
FASB was created in 1973 by the Securities and Exchange Commission (SEC). Even
though FASB creates the accounting standards, the SEC has the ultimate responsibility
for setting and enforcing the accounting standards.
The International Accounting Standards Board or IASB was created to provide
international accounting standards.
The IASB established the International Financial Reporting Standards (IFRS).
With all of the globalization of world trade, the two standards, GAAP and IFRS, are
trying to merge into one single standard code set. One standard would help companies
reduce cost and the complexity of having to manage dual systems.

Bookkeeping and Accounting

These are similar yet they are different.

Bookkeeping involves the systematic recording of business transactions in financial
terms. Basically they do the record keeping functions.
Accounting involves setting up the recordkeeping system, supervising the work of the
bookkeeper, and preparing financial statements and tax reports. This individual(s) is
responsible for more analyze than just simple record keeping.

Many small businesses employee a Bookkeeper/Accountant who does all the work accept
for preparing the annual tax return. The tax return is taken to the companys Certified
Public Accountant (CPA) who specializes in taxes.

Users of Accounting Information

Owners want to know about the companys earnings, debt, and potential for future
earnings since they have invested money into the business.
Managers prepare reports and use accounting to make decisions for the company.
Creditors want to know if the business can repay money owed on loans and purchases.
Government agencies use the accounting data to determine taxes owed and other bills,
such as the utilities, that are owed to them.
Accounting and Technology
Accounting has been enhanced by the use of technology.
Many small business owners use accounting software such as QuickBooks and Peachtree
to do their daily accounting work.
The important thing that any business owner must remember is that the data in the
computer software system is only as reliable as the individual entering the data.
Employees entering accounting data into computer software systems must have a basic
understanding of accounting.
Careers in Accounting
A. Accounting clerk/technician
Duties vary depending on the size of the business.
Requires basic accounting and work experience.
Requires basic recordkeeping functions in small companies
B. Auditing clerk
Verifies business transactions posted by the employees of the company.
Checks documents for mathematical errors.
Generally requires an Associate Degree in Business or Accounting.
C. General bookkeeper
Key person who oversees the bookkeeping operations.
Supervises the accounting clerks.
Job requirements vary depending on the size of the company.
Minimum requirement is generally a two year Associate Degree in Accounting.
D. Paraprofessional accountant
Bridges the gap between a bookkeeper and professional accountant
Manages the duties of both positions.

Works directly under a professional accountant.

Generally requires a two year Associate Degree in Accounting.

E. Accountant
Certified Public Accountant (CPA) generally performs generally accounting,
audit and tax services.
CPA -Requires minimum of a Bachelors Degree but most receive a Masters
Degree in Accounting (MSA). The MSA meets the 150 hours of college work
requirement to sit for the CPA certification exam.
Certified Management Accounts (CMA) work primarily in industry and
government. They use both financial and non-financial data to for decision
Certified Fraud Examiner (CFE) specializes in forensic accounting.
F. Internal auditor
Certified Internal Auditors (CIA) examines and ensures that the companys
financial records are in accordance with GAAP.

Sarbanes-Oxley Act of 2002 (SOX)

This is a U.S. federal law that was enacted in 2002 in response to corporate corruption such
as the Enron bankruptcy.
SOX imposed strict accountability standards on the business and the accounting firms.
Currently the standards only apply to publicly held for-profit organizations, however many
not-for-profit organizations are attempting to comply with the standards.
The two key standards affecting the accounting areas are:
1. The CEOs must take responsibility for the reporting of the accounting reports. They
can no longer say Sally in accounting did it and I knew nothing about it!
2. The accounting firms doing the auditing must be independent. In other words, they
cannot do any other accounting work for that business so there is not a conflict of

*Note: Be sure to review the terms in the Glossary at the end of the chapter.