ACCOUNTING IN SOCIETY

ACCOUNTING IN SOCIETY Using Accounting to Satisfy Psychological Needs MODULE 1-1

PSYCHOLOGICAL NEEDS Accounting helps decision makers satisfy several psychological needs: • Identify – name and label persons and objects • Categorize – group similar items • Order – place in a logical sequence • Simplify – process and summarize large amounts of data Accounting in Society

NEED TO IDENTIFY Psychological Observation: Humans have a natural tendency to put an identifying label on persons and objects Arff! DOG Accounting in Society

NEED TO IDENTIFY – Example What color is this? RED ? Our brains don’t like it when we can’t give something a name. PURPLE Accounting in Society

NEED TO IDENTIFY Some Named Colors Between Red and Blue Accounting in Society

NEED TO IDENTIFY – Example Psychological Observation: We become frustrated when we cannot label. Hi, my name is … Sally Rogers Now what was my name again? Sandy Rogers No, Sally Rogers Accounting in Society

NEED TO IDENTIFY In accounting, business items are identified in the financial statements. Buildings Supplies Raw Materials Equipment Cash Inventory Tools Vehicles Accounting in Society

NEED TO CLASSIFY Psychological Observation: Humans have a natural desire to group similar items together. Accounting in Society

NEED TO CLASSIFY – Example Which of these things belong together? Flowers Fruit Orange Red Yellow Accounting in Society

NEED TO CLASSIFY - Example Things don’t make sense unless they are grouped logically: MULE SHOE MUL ES HOE MULESHOE Accounting in Society

NEED TO CLASSIFY – Example In Business Certain accounts are similar to others and are grouped for simplicity 30 Day CDs Checking Account Equipment Land Money Market Account Vehicles Buildings Work In Process Currency Furniture Finished Goods Raw Materials Accounting in Society

NEED TO CLASSIFY – Example in Business CASH & EQUIVALENTS INVENTORY FIXED ASSETS Raw Materials Currency Vehicles Work In Process Checking Account Equipment Finished Goods Money Market Account Furniture Buildings 30 Day CDs Land Accounting in Society

NEED FOR ORDER Psychological Observation: Humans have a natural desire see items in a certain sequence. Accounting in Society

NEED FOR ORDER – Example C F A E B G H I J D This makes no sense! A B C D E F G H I J Much better! Accounting in Society

NEED FOR ORDER – Example COLD WARMCOOLHOT TEPID This is out of order! HOT WARMTEPIDCOOLCOLD Much better! Accounting in Society

NEED FOR ORDER In accounting, objects usually appear in order of liquidity – the ability to convert to cash. Accounting in Society

NEED FOR ORDER – Example in Business Not In order of liquidity In order of liquidity ASSETS • Buildings • Inventory • Cash • Obsolete Equipment • Investments • Machinery ASSETS • Cash • Investments • Inventory • Machinery • Buildings • Obsolete Equipment Easier to convert to cash Difficult to convert to cash Accounting in Society

NEED FOR SIMPLICITY Psychological Observation: Humans cannot interpret large amounts of data. Statistics – mathematical summaries of large amounts of data Accounting in Society

NEED FOR SIMPLICITY – Example One person made a 76, another made an 87. There was a 95, a 62 , a 91, an 84, a 77 … The average was an 82.5. How did the class do on the examination? ? ? ? Accounting in Society

NEED FOR SIMPLICITY – Example in Business On average, our customers take 36 days to pay their account. It varies, some of our customers pay promptly, others don’t. One of our customers took 55 days to pay off a big sale. We ask smaller customers to pay quickly, usually 30 days, but not all of them do. Does that answer your question? How long are our customers taking to pay us? Accounting in Society

ACCOUNTING IN SOCIETY