CHAP

TER ACCOUNTING and

1 BUSINESS OPERATIONS

A. The Definition of Accounting and Its

Purposes
 Accounting can be defined from at least two
point of views:
A. It can emphasize the uses in which accounting
information is put.
B. It can emphasize the activities of accountants or
accounting process.
 Emphasis on use
Accounting has been defined as:
 a discipline which provides …..
essential information to the efficient
conducting and evaluation of the
activities of any organization or
financial transaction.
What is Accounting?
 The central of accounting is the
organization (business firm).
 Accounting information is vital to a
business firm’s activity. It is used for
decision making by inside
(management) and outside (investors,
creditors, etc) of the organization.
 Emphasis on
activity
In the second definition the work of the
accountants is emphasized
 In accounting ….. the effects of the
economic activities of an enterprise are
accumulated, analyzed, quantified,
classified, recorded, summarized, and
reported as information.
Accountant Must be
 Identifying data are relevant to the
decision to be made.
 Processing or analyzing the relevant
data.
 Transforming data into information
that can be used in making better
decision.
B. The Role and Users of Accounting
Information

 Accounting information is used as

source of information for decision
making.
 Financial accounting information usually
is directed toward the common needs
of a wide variety of users.
The Users of Accounting
Information
 Managers. Accounting information is
used by managers to help them for
making a plan of company’s activities,
evaluating, and making correction.
 Investors or owners. They need the
accounting information for decision
making to decide whether to keep or
give up their ownership interests.
 Creditors. Accounting information will help
them decide whether to extend credit to the
firm (let the firm obtains goods, services, or
cash with postponed payment).
 Governmental bodies. They need an
accounting information for evaluating tax
returns and checking whether the firms are
following governmental rules, regulations,
and laws.
 Non profit organizations. They need
accounting information to help them make a
plan, budget and pay many expenses, like
salaries, utilities expenses, etc.
 Others (labor unions, customers of the firm,
etc). An accounting information is needed to
help them negotiate (discuss arrange) labor
contracts, follow the development of the
company or make a wide variety decision and
make decisions about possible future
relationship.
C. The Accounting Profession

 There are two broad fields in which a

professionally trained accountant can
employ his services:
 Public accounting
 Internal accounting
 Public Accounting
 It concerned to accounting services for
public society
 Licensed professionals engaged in the
practice of public accounting are called
Certified Public Accountant (CPA)
 The most important service performed
by public accountants is auditing of
company’s financial statement
 Others activities of public accountants
are handling tax, accounting
information system, etc
 All CPAs are not necessarily engaged in
the practice of public accounting
 Some of CPAs can be employees of
firms or teachers or working for
governmental bodies or other
profession.
Internal Accounting
 Accountants employed by individual
business firms are engaged in private
accounting. They are called internal
accountant or private accountant
 A number of different services that
private accountants perform are
controller, bookkeeper, cost
accountants, internal auditor, tax
specialist, and budget former
D. The Fields of Accounting Specialization

1. Financial/ general accounting

 It produces financial information which is
prepared in the financial statement
 Users of these information are external
decision maker. They are company’s owners,
creditors, government, employees, and
customers of the company
2. Cost accounting

 This field generate the information of

various costs in the manufacture and
sale of the firm’s goods
 The main category of information
needed by management is to be a plan
and control for daily company activities
 These information will be used to make
both long term and short term plan and
3. Management accounting

 There are three function in

management accounting activities, that
are:
 To choose and plan data
 To analysis data
 To prepare report for management
 A product of management accounting is
management report
4. Auditing
 Auditing is the field of accounting
related by audit activities to notes of
financial accounting product
 An audit is simply an investigation and
study of the financial statement and
reports prepared by a firm to determine
if these reports are prepared according
to generally accepted accounting
principles (GAAP)
5. Tax accounting
 It’s concerned with determining tax
expense of the company. It can help
the company to choose their activities
by management’s judgment
6. Budgetary accounting
 It describes and explains to collect
and process:
data of financial operation in the past time
the predicted of data in the future time

Determined the planning of company’s financial

operation (budget) in the certain time or one year
7. Governmental accounting
 Some government in the world
employed accountants help administer
the monetary of the country.
E. Description of Business Firms

 In terms of what they produce for

society, business firms can be divided
into 2 (two) main types of the firms.
a. Those that goods  merchandising firms and
manufacturing firms
b. Those that produce services  service
companies
a. 1. Merchandising firms

 A Merchandising firm buys goods which

are already in salable form and sell
them to their customers to make profit.
 For example: grocery stores (Carrefour,
Alfamart, Hero, etc)
a. 2. Manufacturing firms
 A manufacturing company obtains raw
materials and supplies of various kinds
and then turns these raw materials into
a different finished product
 For example: cigarette enterprise, like
Gudang Garam, Ltd, Co.
b. Service Firms
 The service firms produce services and
sell them to their customers to make a
profit.
 They don’t produce tangible goods
 For example: hotel, travel bureau, etc
F. The Form of Company Organization

 Most businesses can be classified by

their legal form of organization into 3
(three) group:
a. The proprietorship
b. The partnership
c. The corporation
a. The proprietorship
 It is the simplest kind of organization
and usually the smallest
 This is a business organization with just
one owner
 It is not difficult and not necessary too
much money to manage them
 It has limited sources of fund. It comes
from an individual owner
b. The partnership
 It is a form of organization that is only
slightly more complex than a
proprietorship
 The owners – the partners – are simply
two or more individuals who combine
their efforts to meet common goals
 The sources of fund in this company
come from some owners
c. The corporation
 The formers of the corporation have to
attend a government regulation
 The corporation issues stock certificates
which are written evidence of the
owners’ (stockholders’) investment
 This company can has a large number of
investors – owners to invest their
money in the corporation and thereby
raise capital for it