Answer the following questions based on the text.

1. What is accounting?

2. What is the origin of accounting?

3. What are the responsibilities of accountants?

4. How is accounting information used?

5. Who are the users of accounting information?

6. What is the difference between financial and managerial accounting?

7. What is bookkeeping?

8. What are the responsibilities of bookkeepers?

9. What is financial accounting based on?

10. What are the main objectives of the balance sheet and of the income statement?

11. What has caused changes in accounting and accounting profession?

Accounting information is found everywhere in our society because wherever economic resources are used, an accounting is likely to be required to show what was accomplished at what cost or sacrifice. This is true whether the resources are used by individuals, business firms, units of government, or hospitals. The type of unit served by accounting is entity, a term used to identify the organization for which the accounting service is to be provided and whose accounting or other information is to be analyzed, accumulated, and reported. The organizations may be small, owner-operated enterprises offering a single product or service, or huge multi-enterprise, international conglomerates with thousands of different products and services.

Accounting is a field of specialization critical to the functioning of all types of organizations. Accounting is often referred to as “the language of business” because of is role in maintaining and processing all relevant financial information that an entity requires for its managing and reporting purposes.

Modern accounting is traced to the work of an Italian monk, Lica Pacioli, whose publication in A.D. 1494 described the double-entry system, which continues to be the fundamental structure of contemporary accounting systems in all types of entities. Early histories of business identify the bookkeeper as a valuable staff member. As business became more complex, the need for more astute review and interpretation of financial information was met with the development of a new profession – public accounting.

Accountants help entities be successful, ethical, responsible participants in society. Their major activities include observation, measurement, and communication. These activities are analytical in nature and draw on several other disciplines (e.g., economics, mathematics, statistics, behavioral science, law, history, and language/communication). Accountants identify, analyze, record, and accumulate facts, estimates, forecasts, and other data about the unit’s activities; then they translate these data into information that can be useful for a specific purpose.

Most accounting information is designed to be useful in making economic decisions. Accountants use their experience to aid management to select the best plan of action for the business. Managers and other specialists will need some accounting knowledge in order that they may understand what the accountant is telling them. Rational decisions are usually based on analyzes and comparisons of estimates, which in turn, are based on accounting and other data that project future results from alternative courses of action.

As economic decisions are made by people both within and outside the entity, accounting information may be generated for external and internal users. Managerial accounting is concerned largely with providing information for internal use by the management and focuses more upon planning where a firm is going and on the efficient and effective use of enterprise resources. Financial accounting deals largely with a historical record of what happened and is concerned with reporting upon the financial position of a firm and upon its profitability to outsiders. Because the interfirm comparisons are often made, the information supplied must conform to certain standards, called generally accepted accounting principles (GAAP).

Financial accounting information is provided in the form of financial statements which are usually published by companies in an annual report. The three most common financial statements are the balance sheet, the income statement (profit and loss account), and the cash flow statement. The annual report also contains auditor’s opinion as to the fairness of the financial statements, as well as other information about a company’s activities, products, profits by major segments or divisions, and plans.

The data accumulation and record-making phase of accounting is usually called bookkeeping which is still a common and largely manual activity especially in smaller firms. But with advances in information technology and user-friendly software, it is becoming more and more electronically performed, with internal checks and controls to assure that the input and output are factual and valid.

Large organizations employ many bookkeepers who record all the transactions of a firm in a chronological order in journals showing the names of accounts that are to be debited or credited. Each item on the balance sheet and income statement has a separate account in the company’s ledger to where all the transactions are posted at regular intervals. Though each organization has its own bookkeeping requirements, all accounting systems operate on the same basic principles. The most widespread of them is the use of the double-entry method. This means that each transaction is entered twice (has a twofold effect), to show a value received and a value yielded or parted with. Thus the same transactions entered as a credit (CR) in the account and as a debit (DR) in another account. The resources at a firm’s disposal are known as assets, whereas the indebtedness for these resources if they are provided by someone else other than the owner are known as liabilities. The total amount supplied by the owner is known as equity capital. The whole of financial accounting is based on the accounting equation:

Assets = Liabilities + Equity Capital

The particular products or services each company chooses to offer and the overall size of the organization will be reflected in the financial statements, the three most important of them being the balance sheet, the income statement (profit and loss account), and the cash flow statement.

In all organizations the official time period for which these reports are prepared is called the accounting period. It lasts one year, known as the fiscal year.

A balance sheet is described as a photograph of a company’s business at a moment in time, usually 31 December of a particular year. Most of the contents of a business’s balance sheet are classified under one of three categories: assets, liabilities, and owners’ equity. Some balance sheets include a “notes” section wherein relevant information that does not fit under any of the above accounting categories is included. Assets are items owned by the business, and are further categorized into current assets (cash, securities, and other short-lived assets) and fixed assets (real estate, plant, equipment, vehicles, and other long-lived assets). Owners’ equity is the difference between assets and liabilities or in essence the net worth of the company.

An income statement presents the results of a company’s operation for a given period of time. It repots the revenues generated and the expenses incurred by an entity. Net income results if revenues exceed expenses. If the reverse is true, the business is operating at a loss.

Information on the financing and investing activities of a business may be helpful in appraising its continued profitability and solvency. The statement reporting on these activities is the cash flow statement which shows the flow of funds into and out of a business.

The services that accounting and accountants can provide have been enhanced in many ways by advances in information technology due to the availability of computer software and the Internet. The impact of these changes is revolutionizing accounting and the accounting profession. It creates new opportunities and requires substantial modifications in the traditional financial accounting and reporting model.