31 January 2013
CHAPTER 4: UNDERSTANDING ACCOUNTING ISSUES
WHAT IS ACCOUNTING AND WHO USES IT
Accounting is a comprehensive system for collecting, analyzing, and communicating financial
information. Its purpose is to measure a business’ performance through sales, expenses, profit, losses
and taxes. This then translate this information so managers (and others) can make decisions. Book
Keeping is the act of recording accounting transactions.
Because businesses engage in many thousands of transactions, ensuring consistent, dependable
financial information is mandatory. Accounting Information System (AIS) is an organized procedure for
identifying, measuring, recording, and retaining financial information so that it can be used in
accounting statements and management reports.
Users of accounting information include:
Business Managers who use accounting information to set goals, develop plans, set budgets,
and evaluate future prospects (IE: Directors, shareholders)
Employees and Unions who use accounting information to get paid and to plan for and receive
benefits (IE: Health care, insurance, vacation time, retirement pay)
Investors and Creditors use accounting information to estimate returns to stockholders, to
determine a company’s growth prospects, and to decide if the company is a good credit risk
before investing or lending (IE: Bankers)
Taxing Authorities use accounting information to plan for tax inflows, to determine the tax
liabilities of individuals and businesses, and ensure that correct amounts are paid timely
Government Regulatory Agencies rely on accounting information to fulfill their duties (IE: The
provincial securities commissions require firms to file financial disclosures so that potential
investors have valid information about a company’s financial status)
WHO ARE ACCOUNTANTS AND WHAT DO THEY DO
Controller is the individual who manages all the firms accounting activities; they are the head of the AIS
as the chief accounting officer.
Financial Accounting System is the process whereby interested groups are kept informed about the
financial condition of a firm concerned with external users of information (IE: Consumer groups, unions,
shareholders, government agencies). These documents focus on the activities of the company as a
whole rather than on individual departments or divisions. Historical Reports summarize financial
transactions that have occurred during past accounting periods.
Managerial Accounting is internal procedures that alert managers to problems and aid them in planning
and decisions making concerned with internal users of these documents are used to project and
forecast business activities and are forward looking rather than historical.
Chartered Accountants (CA) are an individual who have met certain experience and education
requirements and has passed a licensing examination. They act as an outside accountant for
other firms. Certified General Accountant (CGA) is individuals who has completed an education program
and passed a national exam. They work in private industries or a CGA firm
Certified Management Accountant (CMA) is individuals who has completed a university degree,
passed a national examination and completed a strategic leadership program. They work in
industries and focuses on internal management accounting
o Audit is an accountant’s examination of a company’s financial records to determine if it
used proper procedures to prepare its financial reports. Companies must provide
audited financial reports when applying for loans or selling stock
o Forensic Accountant is an accountant who tracks down hidden funds in business firms,
usually as part of a criminal investigation, detecting frauds
o Generally Accepted Accounting Principles (GAAP) is standard rules and methods used
by accountants in preparing financial reports
Tax Services include helping clients prepare their tax returns and tax planning
Management Consulting Services are specialized accounting services to help managers resolve
a variety of problems in finance, production scheduling, and other areas
Private Accountants are accountants hired as a salaried employee to deal with a company’s day-to-day
TOOLS OF THE ACCOUNTING TRADE
All accountants, whether public or private, rely on record keeping. The two key concepts of accounting
include accounting equation and double-entry booking.
ASSETS = LIABILITIES + OWNER’S EQUITY
Double-Entry Accounting System is bookkeeping systems that require every transaction to be entered
in two ways, how it affects assets and how it affects liabilities and owner’s equity so that the accounting
equation is always in balance.
Financial Statements are any of several types of broad reports regarding a company’s financial status;
most often used in reference to balance sheets, income statements and cash flows.
Balance Sheets are a type of financial statement that summarizes a firm’s financial position on a
particular date in terms of its assets, liabilities, and owner’s equity
o Assets are anything of economic value owned by a firm or individual.
Current Assets are cash and other assets that can be converted into cash within
Liquidity is the ease and speed with which an asset can be converted to
cash; cash is said to be perfectly liquid
Accounts Receivable are amounts due to the firm from customers who
have purchased goods or services on credit
Merchandise Inventory are the cost of merchandise that has been
acquired for sale to customers but is still on hand