What is accounting all about

1. What is accounting all about Overview and concepts

2. What is it? • Documentation or communication? International Business Program Financial Accounting

3. What is it? • Accounting is NOT documentation • Of course, documentation is necessary • That’s why we use computers • We do NOT learn documentation in the classroom. Why? • Accounting is NOT a technical, problem solving discipline! International Business Program Financial Accounting

4. What is it? • Accounting is communication • About a business enterprise • Much is financial in nature • To persons who are knowledgeable • Persons willing and able to spend time • Support informed decisions • This class is for EXTERNAL users International Business Program Financial Accounting

5. Historical • Accounting in 2000s originated in what is now northern Italy in 1400s. • What was going on then? • Why do we need to know this? International Business Program Financial Accounting

6. Historical • Accounting in 2000s originated in what is now northern Italy in 1400s. • What was going on then? • Why do we need to know this? • Accounting reflects environment and culture • Accounting NOT scientific and universal International Business Program Financial Accounting

7. Historical • Northern Italy in 1400s • End of feudal era • Specialization of business; trade • Large scale ventures, notably Venice • Outside investors, creditors, need for accountability • Money as we know it established • Banks as we know them emerged International Business Program Financial Accounting

8. Historical • Northern Italy in 1400s (Continued) • Role of Roman Catholic church • Itself an investor and creditor • Protect members’ interests; accountability • Repository of knowledge • Br. Luca Paciolo documented accounting scheme (We’ll be seeing him much more) International Business Program Financial Accounting

9. Historical • Accounting had origins in northern Italy • Did not develop in Italy, though • Major development in UK and Anglo-Saxon countries • Why? (We will explore as we go along) International Business Program Financial Accounting

10. Forms of Business • Sole proprietorship • Partnership (but beware because many ‘partnerships’ are corporations) • Corporation-most common • Separate from owners • Limited liability • Group – most important International Business Program Financial Accounting

11. Forms of Business • Group – most important • Combinations of corporations • Essentially one business • Several reasons (see textbook) • Sometimes required • Tax purposes • Operate in different countries International Business Program Financial Accounting

12. Objectives of Enterprises • Create value • Various stakeholders • Shareholders • Employees • Supply chain • National, supra-national, world economy • Society as a whole International Business Program Financial Accounting

13. Purpose of Enterprises • ? International Business Program Financial Accounting

14. Purpose of Enterprises • Produce goods and services • Market willing to buy • Price market willing to pay • Purpose is NOT to make a profit • Profit is necessary but not sufficient condition International Business Program Financial Accounting

15. Users of Accounting Information • See list in textbook. E.g. • Owners (investors) • Employers • Lenders • Supply chain • INFORMATION INTERMEDIARIES • E.g. Financial analysts International Business Program Financial Accounting

16. Users of Accounting Information • In this class interest is in EXTERNAL users • Management obviously has an interest • Separate area called management accounting (see text) International Business Program Financial Accounting

17. Key accounting concepts • Accounting serves markets • Information intermediaries analyze information for markets • Markets are global • Accounting must be global • IASB and IFRS International Business Program Financial Accounting

18. IFRS • Developed by IASB • Mandatory in European Union • But only for public companies • Requires or voluntary in many other countries • Converging with U.S. GAAP • Brief history – formerly IAS International Business Program Financial Accounting

19. Objectives of Financial Statements • Financial position • Balance Sheet • Results of management activity • Income statement • Cash flow statement • Other important information • Changes in equity • Explanatory notes International Business Program Financial Accounting

20. Assumptions and principles • Covered in text; highlights here • Accrual basis • Based on economic event • Not necessarily cash • Going concern • Exist for foreseeable future International Business Program Financial Accounting

21. Assumptions and principles (Continued) • Covered in text; highlights here • Entity has separate identity from owners • Accounting period-only meaningful if reported periodically, usually one year International Business Program Financial Accounting

22. Qualitative Characteristics • Read from text; highlights here • Understandable to informed user • Focus on information intermediaries • Comparable • Over time – most important • Other entities – less important International Business Program Financial Accounting

23. Qualitative Characteristics (Continued) • Read from text; highlights here • Relevance – make a difference • Materiality – can influence decisions International Business Program Financial Accounting

24. Qualitative Characteristics (Continued) • Read from text; highlights here • Reliability NOT ACCURACY • Substance over form; not interested in legalities, but economic reality • Prudence • Does NOT allow hidden reserves, understatement of assets and income! International Business Program Financial Accounting

25. Other Characteristics • Constraints • Hierarchy (See textbook discussion for both) International Business Program Financial Accounting