Overview
This lecture introduces the fundamentals of accounting, explains its role as the "language of business," and distinguishes between internal and external users of accounting information.
What is Accounting?
- Accounting is a system (manual or computerized) for identifying, recording, and communicating business activities.
- The system tracks financial transactions to provide information for decision-making.
- Most modern accounting systems are computerized, using software like QuickBooks or spreadsheets.
Steps of the Accounting Process
- Identification: Recognize relevant financial transactions and events for the business.
- Recording: Systematically and chronologically log transactions, typically by date.
- Communication: Prepare accounting reports (financial statements) and share them with users.
Importance of Accounting
- Accounting is called the "language of business" because it standardizes financial terms for communication.
- It enables informed decision-making by business stakeholders, such as net income, assets, and equity.
- Investors and owners use accounting to evaluate opportunities and communicate value.
Users of Accounting Information
Internal Users
- Internal users are individuals within the company (e.g., managers, employees, internal auditors, board of directors).
- They need detailed and timely information for managing operations, planning, and decision-making.
- Managerial accounting serves internal users.
External Users
- External users are outside the company (e.g., investors, creditors, government, regulators, customers, suppliers).
- Investors (owners/shareholders) and creditors (lenders) are primary external users.
- Financial accounting serves external users by summarizing information in financial statements.
- Regulators, tax authorities, customers, and suppliers use accounting to assess financial health and compliance.
Key Terms & Definitions
- Accounting — A system for identifying, recording, and communicating business financial activities.
- Financial Accounting — The branch of accounting focusing on information for external users.
- Managerial Accounting — The branch of accounting focusing on information for internal users.
- Investors — Owners or shareholders who provide funding to a business.
- Creditors — Lenders who allow a business to borrow money with the expectation of repayment.
- Financial Statements — Reports (income statement, balance sheet, retained earnings) summarizing a company's financial performance and position.
- Internal Users — People inside the organization using accounting information for management.
- External Users — People or entities outside the organization who use accounting information.
Action Items / Next Steps
- Review the definitions of internal and external users.
- Understand the three-step accounting process: identification, recording, communication.
- Prepare for upcoming sessions on financial statements (income statement, balance sheet, retained earnings).
- Practice multiple-choice questions on user groups of accounting information.