Overview
This lecture introduces the basics of accounting, its definitions, history, nature, and the distinction between internal and external users of accounting information.
Definitions and Nature of Accounting
- Accounting is a service activity providing quantitative (mainly financial) information for economic decision-making.
- It is an information system that measures, processes, and communicates financial information about an economic entity.
- Accounting involves identifying, measuring, and communicating economic information for informed judgments and decisions.
- The American Accounting Association and AICPA describe accounting as recording, classifying, summarizing, and interpreting financial transactions.
- Accounting is known as the “language of business” for delivering financial information to various users.
- Accounting follows systematic methods and standards, making it both an art (skillful activity) and a discipline (subject with rules).
History and Evolution of Accounting
- Accounting dates back to ancient civilizations (e.g., Mesopotamia clay tablets in 3600 BC for recording transactions).
- In the 14th century, Luca Pacioli introduced double-entry bookkeeping, considered foundational in modern accounting.
- The French and Industrial Revolutions prompted further development and formal study of accounting theory and practice.
- The 19th century saw the rise of the accounting profession in Europe and America, with the first Chartered Accountants.
- Modern standards and international regulations aim to provide transparency and comparability for global investors.
Users of Accounting Information
- Internal users: People within the organization (e.g., management, employees, owners) who use financial info for planning and decision-making.
- Management uses accounting for performance analysis, resource allocation, and pricing decisions.
- Employees use it for job security and career decisions.
- Owners focus on profitability, resources, and investment decisions.
- External users: Individuals or organizations outside the company (e.g., investors, creditors, regulators, customers, tax authorities).
- Investors decide on buying shares based on financial data.
- Creditors (suppliers, banks) evaluate credit risk and lending.
- Regulatory authorities ensure compliance and protect stakeholders.
- Customers check financial health to ensure supplier stability.
Types of Accounting Information
- Quantitative information includes numerical data (e.g., financial statements).
- Qualitative information covers intangibles (e.g., business reputation).
- Comprehensive decision-making requires both qualitative and quantitative analyses.
Key Terms & Definitions
- Accounting — The process of recording, classifying, and summarizing financial transactions to provide information for decision-making.
- Internal Users — Individuals within the business (management, employees, owners) who use accounting data for organizational decisions.
- External Users — Outside parties (investors, creditors, regulators) who rely on accounting information for financial decisions.
- Double-entry bookkeeping — An accounting system where every transaction affects at least two accounts, maintaining balance.
Action Items / Next Steps
- Review the types and roles of accounting users.
- Prepare for the next topic on the specific information needs of each user group.