CHAPTER 1

Accounting: Information for Decision Making

Accounting
Accounting is defined as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof

Accounting Cycle
Transaction
Journal Entries

Bookkeeping
General Ledger Trial Balance

Accounting

Financial Statements

Types of Accounting Information

Financial

Tax

Managerial

Accounting System
An accounting system consists of the personnel, procedures, devices, and records used by an organization to:

Develop accounting information and Communicate the same to

Accounting System
The accounting process

Economic activities

Accounting links decision makers with economic activities and with the results of their decisions.
Decision makers

Accountin g Informatio n

Actions (decisions)

Accounting System
Factors Affecting the Structure of Accounting System Companys need of accounting information Availability of resources

and record business transactions.

Basic Functions Of An Accounting System Interpret Classify

similar transactions into useful reports.

Summarize and communicate information to decision makers.

Accounting System
Users of Accounting

External- Financial Accounting Internal- Managerial Accounting

External Users

Decision making by External Parties (Management Accounting) Owners

Objectives of External Financial of financial information are The primary external users Reporting
investors and creditors.

External Users
Factor Influencing Decisions Return on Investment Return of Investment Objectives of External Financial Reporting Investment and credit decisions. Assessment of amount, timing and uncertainty of future cash flows. Economic resources, claims to resources, and changes in resources and claims.

External Users
Financial Statements Balance Sheet Income Statement Statement of cash flows

Internal Users
Decision making by Internal Parties (Financial Accounting)
Board of Directors Chief Executive Officer Chief Financial Officer Vice Presidents Business Unit Managers Plant Managers Store Managers Line Supervisors

Internal Users
Objectives of Internal Managerial Reporting Goals, objectives and mission. Assessing both the past performance and future directions of the enterprise Decision Making

Integrity on Accounting Information

Institutional Features Professional Organizations Personal Competence, Judgment and Ethical Behavior

Integrity on Accounting Information

Institutional Features Standards for the Preparation of Accounting Information (GAAP) Financial Accounting Standards Board (FASB) Securities and Exchange Commission (SEC) Internal Control Structure Audits of Financial Statements

Integrity on Accounting Information

Professional Organizations American Institute on CPAs Institute on Management Accountants Institute of Internal Auditors American Accounting Association Personal Competence, Judgment and Ethical Behavior

Accounting Rules

Accrual Vs Cash Method

Cash Method is an accounting system that recognizes revenue and expenses on a cash basis. Under the accrual method, revenue and expenses are recorded according to when they are earned and incurred.

Bookkeeping
Bookkeeping is the recording of financial transactions

Double Entry Bookkeeping System Vs Single Entry Bookkeeping System