Reading: Lesson 1 - Accounting in Action

WHAT IS ACCOUNTING

Accounting is the process of identifying, recording and communicating the economic events of an entity.  An entity is a "thing" with distinct and independent existence.  For example, a small business owned by one owner will identify the economic events related to his business in a systematic chronological order.  These events are measured in dollars and cents.  Once the events are identified and recorded, they will then be communicated by the use of financial reports.  These reports are called financial statements.

  **The above illustrates the activities in the accounting process.

Bookkeeping is a function used in the accounting process.  It usually only involves the recording of information.  

WHO USES THE DATA

There are two types of users, Internal and External.  

1.) Internal users are the managers of a company.  All departments use the accounting data.    For example, the Director of Human Resources will use the data to determine if the company can afford to give raises to its employees. The Marketing department will use the data to determine what price to charge its customers.   

Internal users use Managerial accounting.  It provides internal reports to help users make decisions for their company.  Some examples are reports that consist of projection of income for the sales department and cash forecasts for the financial department.

2.) External users are individuals or organizations outside of the company.  Investors will use the data to determine if they want to buy or sell their stock in the company.  Creditors use the data to determine if the company is a risk when granting credit (suppliers) or loaning money (bankers).  

External users use Financial accounting.  They use the financial statements of a company.  Some external users may consist of tax authorities.  They will use the reports to determine if a company is compliant with tax laws.  The Securities and Exchange Commission determine if a company is following the rules set up by the FASB.