Chapter 4 Pt 1: Understanding Accounting Issues
WHAT IS ACCOUNTING AND WHO USES IT?
Accounting—a comprehensive information system for collecting, analyzing and
communicating financial information. It is a system for measuring business
performance and translating those measures into info for management decisions.
Bookkeeping is one phase of accounting –the recording of transactions. It uses
performance measures to prepare performance reports for owners, the public, and
regulatory agencies. To meet objectives, accountants keep records of transactions
such as taxes paid, income received, and expenses incurred. As well, they analyze
the effects of these transactions on particular activities. Accountants can determine
how well a business is being managed and how financial strong it is. The accounting
information system (AIS) is an organized procedure for identify, measuring,
recording, and retaining financial info so that it can be used in accounting statements
and management reports. It includes all the people, reports, computers, procedures,
and resources for compiling financial transactions. There are numerous users of
• Business managers: use accounting info to set goals, develop plans, set
budgets and evaluate future prospects.
• Employees and unions: use accounting info to get paid and to plan for and
receive such benefits as health care, insurance, vacation time, and retirement
• Investors and creditors: to estimate returns on stockholders, to determine a
company’s growth prospects and to decide if the company is a good credit risk
before investing or lending.
• Taxing authorities: use accounting info to plan for tax inflows, to determine the
tax liabilities of individuals and businesses and to ensure that correct amounts
are paid in a timely fashion.
• Government regulatory agencies: rely on accounting info to fulfill their duties;
the provincial securities commissions, for example, require firms to file
financial disclosures so that potential investors have valid info about a
company’ financial status.
WHO ARE ACCOUNTANTS AND WHAT DO THEY DO?
The head of the AIS is the controller—individual who manages all the firm’s
accounting activities. They ensure that the accounting system provides the reports
and statements needed for planning, controlling, and decision-making activities.
• Financial and Managerial Accounting: distinguished by the different users they
o Financial Accounting: financial accounting system—the process
whereby interested groups (e.g. consumer groups and unions) are kept
informed about the financial condition of a firm. The documents focus on
the activities of the company as a whole. Financial accountants must
conform to standard reporting formats and procedures imposed by the
accounting profession and government regulatory agencies. The info in
such reports is mostly historical: it summarizes financial transactions
that have occurred during past accounting periods. o Managerial (Management) Accounting –internal procedures that
alert managers to problems and aid them in planning and decision
making. Reports to these users serve the company’s individual units,
whether departments, projects, plants, or division. Internal reports may
be designed in any form that will assist internal users in planning,
decision making and controlling. As projections and forecasts of both
financial data and business activities, internal reports are an extremely
important part of the management accounting system. They are forward
looking, rather than historical.
• Professional Accountants
o Chartered accountant (CA) –an individual who has met certain
experience and education requirements and has a passed a licensing
exa--mination; acts as an outside accountant for other firms. The
accountant must earn a university degree, complete an education
program and pass a national exam. CA firms provide audit, tax and
management services. They focus on external financial reporting;
certifying for various interested parties that the financial records of a
company reflects the true financial condition of the firm.
o Certified General Accountants (CGA)–individual who has completed
an education program and has passed a nation exam; works in private
industry or a CGA firm. CGAs can now audit corporate financial