CHAPTER 1

Accounting as the Basis for Management

Decisions

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 Topics
• What is Accounting?
• Users of Accounting Information
• Financial Accounting Vs. Management Accounting
• Organizations and business transactions
• Types of business organizations
• Accounting profession
• Accounting as an information system
• Financial Statements

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 What is Accounting?

The language of business

• A system for collecting, summarizing, analyzing, and

reporting in monetary terms information about an
organization.
• The process of identifying, measuring and
communicating economic information to permit
informed judgments and decisions by users of the
information.

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 Accounting

COLLECTING
SYSTEM SUMMARIZING
ANALYZING
REPORTING

MONETARY TERMS INFORMATION

ORGANIZATION

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USERS OF ACCOUNTING SYSTEM

90
80
70 MAIN USER OF
60 ACCOUNTING
50 2001
INFORMATION
40 2002
30 2000 OTHER USERS
20
CREDITORS
10
INVESTORS
0
1st 2nd 3rd 4th EMPLOYEES
Qtr Qtr Qtr Qtr OWNERS
GOVERNMENT

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 Types of Accounting
Financial Accounting
• Creditors EXTERNAL USES OF
• Investors ACCOUNTING INFORMATION
• Government
• Financial institution

Managerial Accounting
• Management INTERNAL USES OF
• Employees ACCOUNTING INFORMATION
• owners

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Users of Accounting Information

External users
Internal users (Financial
(Management Accounting)
Accounting)
• Those who are
• Those who work in indirectly involved
the organizations with the
organization

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 INTERNAL USERS
• Owners – as the owners, they are interested in the profits earned
from their investments and the financial stability and growth of
their business.

• Managers – management needs information as guidance in

planning, organizing and controlling the organization and
analyzing the operation of business.

• Employees – employees are interested in the business ability to

progress and expand. They look for steady employment, earning
capacity and other monetary benefits that are to be gained from a
financially stable business.

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 EXTERNAL USERS
• Creditors / bankers – creditors / bankers are interested to know the ability of the
business in repaying the amount owing to them.

• Current and potential investors – investors require information regarding the

solvency and financial strength of the business, its present and future earning
capacity and the ability of the management.

• Government – the government is interested in the financial statements and

reports of a business for a tax purposes.

• Consumers / of Products Services – Consumers are interested in the

establishment of good accounting controls as a means of reducing cost of
production, selling and distribution; and hence the reduction of the prices of the
goods they purchase.

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 Purpose of Accounting Information

• To know the financial status of the

organization
• For easier reference
• To avoid misleading financial statements

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ORGANIZATIONS

• Distinct Entities
• A person or persons
with stated purposes
• Operating in an
environment by
interacting with other
organizations

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 BUSINESS TRANSACTIONS
• Interaction between organizations
• Quid Pro Quos
• Equal Exchange of values
• Values Received Equal Values Given
• Services = Pay Check

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Forms of Legal Organization

Sole
Partnerships
Proprietorship

Corporations

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Sole Proprietorship
• One owner
• Total control of
operations
• No sharing of profits
• Simplicity
• Taxation
• Limited Life
• Unlimited Liability
• Difficult to expand

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 Partnership
• Easy to organize
• Combination of capital and experience
• Taxation
• Limited Life
• Unlimited Liability
• Mutual agency
• Difficult to expand

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Corporation
• Limited Liability
• Unlimited life
• Ease to transfer ownership
• Access to capital for
expansion
• Double taxation
• More government control
• Complex decision-making
process

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 The Accounting Profession
Public Accountants
• Offer their expertise to the general public through
the services they perform.

Private Accountants
• Employees of individual companies and are
involved in a number of activities, including cost
and tax accounting, systems and internal auditing.

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Not-for-profit accounting
• Reporting and control for government units,
foundations, hospitals, labor unions,
colleges/universities, and charities.

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 ACCOUNTING AS
INFORMATION SYSTEM

INPUT ---- PROCESS ------------ OUTPUT

SOURCE ACCOUNTING INFORMATION

DOCUMENTS CYCLE TO MANAGEMENT

Financial Statements

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 Financial Statements-Output of the
Accounting System
Source Document Process Output

Balance Sheet
Income Statement
Statement of Cash
Flow

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ACCOUNTING PROCESS
Transactions

Source Documents

Journals

Ledgers

Trial Balance

Adjustments

Financial Statement

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