Chapter 1
Accounting and the Business Environment
Why is Accounting Important?
You’ve heard the term accounting, but what exactly is it? Accounting is the information system that
measures business activities, processes the information into reports, and communicates the results to
decision makers. Accounting is the language of business. The be!er you understand the language of
business, the be!er you manage your own business, be a valuable employee, or make wise investments.
Decision Makers: The Users of Accounting Information
We can divide accounting into two major field: financial accounting and managerial
accounting. Financial accounting provides information for external decision makers, such as
outside investors, lenders, customers, and the federal government. Managerial accounting
focuses on information for internal decision makers, such as the company’s managers and
employees.
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Chapter 1
Accounting and the Business Environment
The Accounting Profession
All businesses need accountants!
Certi$ed Public Accountants, or CPAs, are licensed professional accountants who serve the
general public. CPAs work for public accounting firm, businesses, government entities, or
educational institutions. To be a CPA one must meet the educational and/or or experience
requirements and pass a qualifying exam.
Certi$ed Management Accountants, or CMAs, are certi$ed professionals who specialize in
accounting and financial management knowledge. Generally, CMAs work for a single company.
Accountants generally work either in public, private, or governmental accounting. Public
accounting involves services such as auditing and tax preparation. Well-known public
accounting firm include Ernst & Young, Deloi!e, PwC, and KPMG. Private accounting involves
working for a single company such as Amazon.com, Walmart, or Dell. Other accountants work
for the federal or state governments.
What are the Organizations and Rules That Govern Accounting?
All professions have regulations.
Governing Organizations
In the United States, the Financial Accounting Standards Board (FASB), a privately funded
organization, oversees the creation and governance of accounting standards. The FASB work
with governmental regulatory agencies like the Securities and Exchange Commission (SEC). The
SEC is the U.S. governmental agency that oversees the U.S. financial markets.
Generally Accepted Accounting Principles
The guidelines for accounting information are called Generally Accepted Accounting Principles
(GAAP). GAAP is the main U.S. accounting rule book and is currently created by the FASB.
The Economic Entity Assumption
The most basic concept in accounting is that of the economic entity assumption. An economic
(business) entity is an organization that stands apart as a separate economic unit. We draw
boundaries around each entity to keep its a<airs distinct from those of other entities. An entity
refers to one business, separate from its owners.
A business can be organized as a sole proprietorship, partnership, corporation, or limited-
liability company (LLC).
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Chapter 1
Accounting and the Business Environment
The Cost Principle
The cost principle states that acquired assets and services should be recorded at their actual
cost (also called historical cost). This principle means we record a transaction at the amount
shown on the receipt – the actual amount paid. This principle also holds that the accounting
records should continue reporting the historical cost of an asset over its useful life. Why?
Because cost is a reliable measure.
International Financial Reporting Standards
Companies who are incorporated in or do signiticant business in another country might be
required to publish financial statements using International Financial Reporting Standards
(IFRS). IFRS is a set of global accounting standards that are used or required by more than 120
nations. They are generally less specific and based more on principle than U.S. GAAP. IFRS
leaves more room for professional judgment. For example, unlike U.S. GAAP, IFRS allows
periodic revaluation of certain assets and liabilities to restate them to market value, rather than
keeping them at historical cost. At one point in time it was thought that SEC would endorse
IFRS. However, the SEC has backed away from this strategy and is currently considering
whether a single set of global accounting standards is achievable.
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Chapter 1
Accounting and the Business Environment
Ethics in Accounting and Business
Ethical considerations a<ect accounting. Investors and creditors need relevant and faithfully
representative information about a company that they are investing in or lending money to.
To handle conDicts of interest and to provide reliable information, the SEC requires publicly
held companies to have their financial statements audited by independent accountants. An
audit is an examination of a company’s financial statements and records. The independent
accountants then issue an opinion that states whether the financial statements give a fair
picture of the company’s financial situation.
