Chapter1

IntroductiontoAccounting1.1Whatisaccounting1.2Formsofbusinessentities1.3Businessactivities1.4Usersofaccountinginformation1.5Typesofaccounting1.6Careersinaccounting1.7Thedevelopmenttrendofaccountingintheeraofdigitaltechnology21.1WhatisaccountingAccountingisaninformationsystemthatidentifies,records,andcommunicatestheeconomiceventsofanorganizationtointerestedusers.Accountingisabusinesslanguage.31.2FormsofbusinessentitiesThreeformsofbusiness:SoleproprietorshipsPartnershipsCorporations4AsoleproprietorshipAnunincorporatedbusinessonlyownedbyoneperson.(1)Theowneralsoactsasthemanager.(2)Theownerispersonallyliableforthedebtsofthebusiness.Ifthebusinesshasfinancialdifficulties,creditorscanforcetheownertosellhisorherpersonalassetstopayforthebusinessdebts.(3)Itsadvantageissimplicity.5ApartnershipAnunincorporatedbusinessownedbytwoormorepersonsvoluntarilyactingaspartners.(1)Theownersofapartnership,whenunincorporated,arealsopersonallyliableforthedebtsofthebusiness.(2)Thepartnershiphastheabilitytoraiselargeramountsofcapitalinvestmentfrommultipleowners.(3)Theindividualsarevitaltothepartnership,covenantsareusuallydrawnupwhichmakesitdifficultforindividualpartnerstoexitthelegalentity.6AcorporationAbusinessorganizationasaseparatelegalentityownedbystockholders.(1)Investorsinacorporationreceivesharesofstocktoindicateownershipclaims.(2)Comparedwithsoleproprietorshipsandpartnerships,itiseasyforcorporationstoraiselargeramountsoffunds.(3)Corporatestockholdershavenopersonalliabilitytothelegalentityandtheirrisksarelimitedtotheirpurchaseamountonly.71.3BusinessactivitiesThreetypesofactivity:FinancingactivityInvestingactivityOperatingactivity8

FinancingactivityAcompanyhastwoprimarysourcestoraisefunds.Oneisborrowingmoney.Personsorentitiestowhomacompanyowesmoneyarecreditors.Amountsowedtocreditorsarecalledliabilities.Acreditorhasalegalrighttobepaidattheagreed-upontime.Theotherisissuingsharesofstockinexchangeforcash.Sellingsharesofstocktoinvestorsinexchangeforownershiprights.Thetotalamountpaidinbystockholdersisownershipofsharesofcommonstockandcalledpaid-incapital.Stockholdershavenolegalrighttoexpectanypaymentsonaregularbasis.Thepaymentspaidtostockholdersarecalleddividends.9InvestingactivityInvestingactivitiesinvolvethepurchaseoftheresourcesacompanyneedsinordertooperate.Theseresourcescanbebuildings,furniture,computers,anddeliverytrucksamongmanyothercapitalinvestments.Resourcesownedbyabusinessarecalledcapitalassets.Assetshavedifferenttypesandnames.Various,non-current,andtangibleassetsarecalledproperty,plant,andequipment(PPE).10OperatingactivityOnceabusinesshasassets,itcanbeginitsoperations.Theamountsearnedonthesaleofitsproductsorservicesarecalledrevenues.Sourcesofrevenuescommontomanybusinessesaresalesrevenues,servicerevenues,andinterestrevenues(typicallynotoperatingrevenuesbutfinancingrevenues).111.4UsersofaccountinginformationTwogroupsofaccountinginformationusers:InternalusersExternalusers12InternalusersInternalusersareemployeesofanenterpriseandaredirectlyinvolvedinmanagingandoperatingthebusiness.Frombasiclaborcategoriestochiefexecutiveofficers,allemployeesarepaid,andtheirpaychecksaregeneratedbytheaccountinginformationsystem.Internalusersincludetheboardofdirectors,chiefexecutiveofficers,chieffinancialofficers,marketingmanagers,productionsupervisors,andsoon.13ExternalusersExternalusershaveacurrentorpotentialfinancialinterestinthereportingentity,butarenotdirectlyinvolvedinmanagingandoperatingthebusiness.Themainexternalusersincludeinvestorsandcreditors.Investorsuseaccountinginformationtodecidewhethertobuy,hold,orsellstocks.Creditorsuseaccountinginformationtodecidewhethertosellgoodsorservicesoncreditorlendmoneytoanentity.Otherexternalusersofaccountinginformationaregovernmentagencies,suppliers,customers,generalpublic,andsoon.141.5TypesofaccountingThreetypesofaccounting:FinancialaccountingManagerialaccountingTaxaccountingAuditingandinternalcontrolaresubjectsrelatedtoaccounting15FinancialaccountingFinancialaccountingreferstoinformationdescribingthefinancialresources,obligations,andactivitiesofaneconomicentity(eitheranorganizationoranindividual).Financialaccountinginformationisdesignedprimarilytoassistinvestorsandcreditorsindecidingwheretoplacetheirscarceinvestmentresources.Suchdecisionsareimportanttosociety,becausetheydeterminewhichcompaniesandindustrieswillreceivethefinancialresourcesnecessaryforgrowth.16ManagerialaccountingAccountingisabusinesslanguage.Thelanguageusedbypeopleworkinginsideofabusinessismanagerialaccounting.Managerialaccountingisusedbymanagerstomakemanagerialdecisionsandisguidedbytheuniqueneedsofthecompany,insteadoflegalrequirements.17TaxaccountingThemainpurposeoftaxaccountingistoprepareincometaxreturns.Taxreturnsarebasedonfinancialaccountinginformation.Theinformationisoftenadjustedorrecognizedtoconfirmwithincometaxreportingrequirements.Taxinformationcomplieswithspecializedlegalrequirementsthatrelatetoacompany’sresponsibilitytopayanappropriateamountoftaxes.18AuditingTheaccumulationandevaluationofevidenceaboutinformationtodetermineandreportonthedegreeofcorrespondencebetweentheinformationandestablishedcriteria.Auditingshouldbedonebyacompetent,independentperson.19InternalcontrolAprocess,effectedbytheentity’sboardofdirectors,managers,andotherpersonnel,designedtoprovidereasonableassuranceregardingtheachievementofobjectivesinthecategoriesof(1)effectivenessandefficiencyofoperations;(2)reliabilityoffinancialreporting;(3)compliancewithapplicablelawsandregulations;and(4)securingandprotectingthecompany’sassetsfromloss.201.6CareersinaccountingFourbroadareasofcareersinaccounting:PublicaccountingManagerialaccountingGovernmentaccountingAccountingeducation21

PublicaccountantCertifiedPublicAccountant(CPA)offersavarietyofaccountingservicestothepublic.TheCPAsmayworkinaCPAfirmorassolepractitioners.Themainworkofpublicaccountantsistoauditfinancialstatements,incometaxwork,andmanagementconsulting.22

ManagementaccountantManagementaccountantsworkforenterprises.Theydevelopinformation,interpretaccountinginformationdesignedspeciallytomeetvariousneedsofmanagement,aswellasprovideguidancetowardincreasingprofits.23

GovernmentaccountantAccountinginformationisusedbygovernmentagenciestoallocatetheirresourcesandcontroltheiroperations.Therefore,theneedforaccountantsingovernmentagenciesissimilartothatinbusinessorganizations24

AccountingeducatorAccountingeducatorsofferopportunitiesforteaching,research,governanceandconsulting.Theycontributetotheaccountingprofessioninmanyways,includingeffectiveteaching,publishingsignific