Accounting: The Language of Business Flashcards
Why do we need accounting?
We need accounting so that business owners/managers/interest parties can evaluate the performance of the business.
Definition of Accounting
Process where finanical information is recorded, classified, summarized, interpreted and communicated to owners, managers and other interested parties.
What is the use of an accounting system?
It is used to accumulate and classify financial data then summarize them in into periodic reports called financial statements.
4 Kinds of Accounting Careers
Public
Managerial / Private
Governmental
Education
What do accountants do?
- Establish records and procedures
- Supervises the operations
- Interprets the resulting information
…of the accounting system
What is the difference between public , private, governmental, and education accounting?
Public accountants provide accounting services for other businesses. Private accountants work for a single busines exclusively. Governmental accountants work for state/government units. In education, the accountant is a member of the academe.
3 Services of Public Accountants
- Auditing
- Tax Accounting
- Management Advisory Services
Definition of Auditing
Review of financial statements to assess fairness and adherence to generally accepted accounting principles (GAAP)
2 Branches of Tax Accounting
Tax Compliance
Tax Planning
Definition of Tax Compliance
Preparation of tax returns and the audit of those returns
Definition of Tax Planning
Advice clients how to structure financial affairs in order to reduce tax liability
Definition of Management Advisory Services
Helping clients improve information systems or business performance
Requirements to be a CPA
- Certain number of college credits in accounting courses
- Demonstrate good personal character
- Pass Uniform CPA Examination
- Fulfill experience requirements of the state of practice
Users of Financial Information (10)
- Owners and Managers
- Lenders and creditors
- Investors
- Employees
- Tax Authorities
- Customers
- Regulatory Agencies
- Employee Unions
- Trade Associations
- Financial Intermediaries
These users are classified as internal users
Owners and Managers
Employees
Entity
Recognized as having its own separate identity
Economic Entity
A business/organization whose major purpose is to profit for its owners’
Social Entities
NGOs
Based on the nature of activities
Types of Business Enterprises
- Service
- Merchandising
- Manufacturing
Service Business
Services to clients for a fee
Merchandising Business
Buys and sells goods without altering their original form
Maintains INVENTORY which are held for sale in the normal business operations
Manufacturing Business
Buys raw materials, processes them into finished goods, and sells them at a higher price than the cost
Based on ownership
Types of Business Enterprise
- Sole Proprietorships
- Partnership
- Corporation
- Cooperation
Sole Proprietorships
- Owned by one
- Ends when the owner is no longer willing or able to keep it going
- Owner is legally responsible for debts and taxes of the business. Creditors go to them when busines cannot pay debts.
- The owner and the business’ income combined to compute the total tax responsibility of the owner to pay income taxes
Advantages of Sole Proprietorship
- Ease of entry and exit
- Full ownership control
- All profits go directly to owners same as suffers and losses
- Tax savings
- Few government regulations
Disdvantages of Sole Proprietorship
- Unlimited liability
- Limitations in raising capital
- Lack of continuity
Partnerships
- A business entity owned by two or more
- Partnership Agreement made at the start that details the rights, obligations, and limitations of each partner
- Liability Partnership Act - a general partnership that provides some limited liability for all partners
Often used for service-type businesses including professional practices
Partnerships
Advantages of Partnerships
- Ease of formation
- Additional sources of capital
- Management base
- Tax implications
Disadvantages of Partnerships
- Unlimited liability
- Difficulty in transferring ownership
- Lack of continuity
- Limitations in raising capital
Corporations
- The only form of business that is a separate legal entity
- Separate from owners
- Has legal right to own property and do business in its own name
Privately Owned Corporations
- “Closely held corporations”
- Limited to specific individuals
- Stock not traded on an exchange
Publicly Owned Corporations
Bought and sold on stock exchanges and OTC markets
Stock
In the form of stock certificates, representing ownership of corporation
Corporate Owners are called
Stockholders / Shareholders
Stockholders / Shareholders are not personally responsible for debts or taxes. If they are unable to pay the bill…
stockholders can lose their investment = stockholders will not lose more than the cost of the shares of stock
Advantages of Corporations
- Limited liability
- Unlimited life
- Ease in transferring ownership
- Ability to raise capital
Disadvatages of Corporations
- Time and cost in formation
- More regulation
- Taxes
Cooperative
- Owned by a group minimum of 15 serving as benefactors of business endeavors
- Members can become part by purchasing shares
Advantages of Cooperatives
- Unlimited life
- Ease in transferring ownership
- Ability to raise capital
- Democratic organization
- Exempt from taxes, generally
- Less regulations
Disadvantages of Cooperatives
- One member one vote policy
- Members’ participation may be lacking
Accounting vs. Auditing
- Auditing starts when accounting ends.
- Accounting - to show the performance, profitability, and financial position of an organization
- Auditing - to reveal to which extent the financial statements of an organization are true and fair
Accounting vs. Bookkeeping
Bookkeeping is the initial stage of accounting
Accountants direct and review the work of bookkeepers
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Accounting vs. Accountancy
Accountancy is the systematic body of knowledge that prescribes accounting principles followed during the accounting process.
Financial Accounting vs. Managerial Accounting
Managerial accounting involves identifying, measuring, analyzing, interpreting, and communicating financial information to managers to help them set an organization’s goals.
Financial accounting involves recording and summarizing the stream of transactions and economic activity resulting from business operations and reporting it to investors and regulators.
Primary Users
Investors and Creditors
