Financial Accounting Denver CO

In a Nutshell

Accounting is the provision of financial information to managers or owners so that they can make business decisions.

Accounting measures, monitors and controls business activities.

Financial accounting supplies financial information to external users.

Management accounting serves the needs of managers.

Users of accounting information include shareholders and managers.

Accounting theory and practice are affected by history, country, technology and organisation.

Auditing, bookkeeping, financial accounting, financial management, insolvency, management accounting, taxation and management consultancy are all branches of accountancy.

Accountants may be members of professional bodies, such as the Institute of Chartered Accountants in England and Wales.

Although very useful, accounting has several limitations such as its historic nature and its failure to measure the non-financial aspects of business.

Introduction
The key to understanding business is to understand accounting. Accounting is central to the operation of modern business. Accounting enables businesses to keep track of their money. If businesses cannot make enough profit or generate enough cash they will go bankrupt. Often accounting is called the ‘language of business’. It provides a means of effective and understandable business communication. If you understand the language you will, therefore, understand business. However, like many languages, accounting needs to be learnt. The aim of this book is to teach the language of accounting, in particular, financial accounting.

Nature of Accounting
At its simplest, accounting is all about recording, preparing and interpreting business transactions. Accounting provides a key source of information about a business to those who need it, such as managers or owners. This information allows managers to monitor, plan and control the activities of a business.

This enables managers to answer key questions such as:

How much profit have we made?

Have we enough cash to pay our employees’ wages?

What level of dividends can we pay to our shareholders?

In small businesses, managers and owners will often be the same people. However, in larger businesses, such as large companies, managers and owners will not be the same. Managers will run the companies on behalf of the owners. In such cases, accounting information serves a particularly useful role. Managers supply the owners with financial information in the form of a profit and loss account, a balance sheet and a cash flow statement. This enables the owners to see how well the business is performing. In companies, the owners of a business are called the shareholders.

Essentially, therefore, accounting is all about providing financial information to managers and owners so that they can make business decisions (see Definition 1.1). The formal definition (given below), although dating from 1966, has stood the test well as a comprehensive definition of accounting.

DEFINITION 1.1
Accounting Working definition The provision of information to managers and owners so that they can make business decisions.

Formal definition
‘The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.’ American Accounting Association (1966), Statement of Basic Accounting

Importance of Accounting
Accounting is essential to the running of any business or organisation. Organisations as diverse as ICI, Barclays Bank and Manchester United football club all need to keep a close check ontheir finances.

At its simplest, money makes the world go round and accounting keeps track of the money. Businesses depend on cash and profit. If businesses do not make enough cash or earn enough profit, they will get into financial difficulties, perhaps even go bankrupt. Accounting provides the framework by which cash and profit can be monitored, planned and controlled. Unless you can understand accounting, you will never understand business. This does not mean everybody has to be an expert accountant. However, it is necessary to know the language of accounting and to be able to interpret accounting numbers. In some respects, there is a similarity between learning to drive a car and learning about accounting. When you are learning to drive a car you do not need to be a car mechanic. However, you have to understand the car’s instruments, such as a speedometer or fuel gauge. Similarly, with accounting, you do not have to be a professional accountant. However, you do need to understand the basic terminology such as income, expenses, profit, assets, liabilities, capital, and cash flow.

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