DEFINITION OF ACCOUNTING

It is a systematic process of identifying, recording, measuring, classifying, verifying,

summarizing, interpreting and communicating financial information. It reveals profit or loss for a
given period, and the value and nature of a firm's assets, liabilities and owners' equity.

Accounting provides information on the

resources available to a firm,

the means employed to finance those resources, and
the results achieved through their use.

USERS OF ACCOUNTING
The progress and reputation of any business firm is built upon the sound financial footing. There
are a number of parties who are interested in the accounting information relating to business.
Accounting is the language employed to communicate financial information of a concern to such
parties.

According to Slawin and Reynolds, “Conceptually, accounting is the discipline that provides
information on which external and internal users of the information may base decisions that
result in the allocation of economic resources in society”. That is, users of accounting
information may be grouped into two classes, viz., internal users and External users.

(A) Internal Users:

Internal users of accounting information are those persons or groups which are within the
organization.

Following are such internal users:

1. Owners:
The owners provide funds or capital for the organization. They possess curiosity in knowing
whether the business is being conducted on sound lines or not and whether the capital is being
employed properly or not.
Owners, being businessmen, always keep an eye on the returns from the investment. Comparing
the accounts of various years helps in getting good pieces of information. Properly kept accounts
are good proof in dispute, they determine the amount of goodwill and facilitate in assessing
various taxes.

2. Management:
The management of the business is greatly interested in knowing the position of the firm. The
accounts are the basis; the management can study the merits and demerits of the business
activity. Thus, the management is interested in financial accounting to find whether the business
carried on is profitable or not. The financial accounting is the “eyes and ears of management and
facilitates in drawing future course of action, further expansion etc.”

3. Employees:
Payment of bonus depends upon the size of profit earned by the firm. The more important point
is that the workers expect regular income for the bread. The demand for wage rise, bonus, better
working conditions etc. depend upon the profitability of the firm and in turn depends upon
financial position. For these reasons, this group is interested in accounting.

(B) External Users:

External users are those groups or persons who are outside the organization for whom accounting
function is performed.

Following are such external users:

1. Creditors:
Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual
that these groups are interested to know the financial soundness before granting credit. The
progress and prosperity of the firm, to which credits are extended, are largely watched by
creditors from the point of view of security and further credit. Profit and Loss Account and
Balance Sheet are nerve centres to know the soundness of the firm.

2. Investors:
The prospective investors, who want to invest their money in a firm, of course wish to see the
progress and prosperity of the firm, before investing their amount, by going through the financial
statements of the firm. This is to safeguard the investment. For this, this group is eager to go
through the accounting which enables them to know the safety of investment.

3. Government:
Government keeps a close watch on the firms which yield good amount of profits. The state and
central Governments are interested in the financial statements to know the earnings for the
purpose of taxation. To compile national accounts the accounting is essential.

4. Consumers:
These groups are interested in getting the goods at reduced price. Therefore, they wish to know
the establishment of a proper accounting control, which in turn will reduce the cost of
production, in turn less price to be paid by the consumers. Researchers are also interested in
accounting for interpretation.

5. Research Scholars:
Accounting information, being a mirror of the financial performance of a business organization,
is of immense value to the research scholar who wants to make a study into the financial
operations of a particular firm.

To make a study into the financial operations of a particular firm the research scholar needs
detailed accounting information relating to purchases, sales, expenses, cost of materials used,
current assets, current liabilities, fixed assets, long-term liabilities and shareholders’ funds which
is available in the accounting records maintained by the firm.

6. Financial Institutions:
Bank and financial institutions that provide loan to the business are interested to know credit-
worthiness of the business. The groups, who lend money need accounting information to
analyses a company’s profitability, liquidity and financial position before making a loan to the
company. Further, they keep constant watch on the operating results and financial position of the
business through accounting data.
7. Regulatory Agencies:
Various Government departments such as Company law department, Reserve Bank of India,
Registrar of Companies etc. require information to be filed with them under law. By examining
this accounting information they ensure that concerned companies are following the rules and
regulations.

USES OF ACCOUNTING

Accounting provides companies with various pieces of information regarding business

operations. It is often conducted by a company & amp;rsquo;s internal accounting
department and reviewed by a public accounting firm. Small businesses often have
significantly less financial information recorded during the accounting process.
However, business owners often review this financial information to determine how
well their business is operating. Accounting information can also provide insight on
growing or expanding current business operations.
Performance Management
A common use of accounting information is measuring the performance of various
business operations. While financial statements are the classic accounting information
tool used to assess business operations, business owners may conduct a more
thorough analysis of this information when reviewing business operations. Financial
ratios use the accounting information reported on financial statements and break it
down into leading indicators. These indicators can be compared to other companies in
the business environment or an industry standard. This helps business owners
understand how well their companies operate compared to other established
businesses.

Create Budgets
Business owners often use accounting information to create budgets for their
companies. Historical financial accounting information provides business owners with
a detailed analysis of how their companies have spent money on certain business
functions. Business owners often take this accounting information and develop future
budgets to ensure they have a financial road map for their businesses. These budgets
can also be adjusted based on current accounting information to ensure a business
owner does not restrict spending on critical economic resources.

Business Decisions
Accounting information is commonly used to make business decisions. Decisions may
include expanding current operations, using different economic resources, purchasing
new equipment or facilities, estimating future sales or reviewing new business
opportunities. Accounting information usually provides business owners information
about the cost of various resources or business operations. These costs can be
compared to the potential income of new opportunities during the financial analysis
process. This process helps business owners understand how current business
operations will be affected when expanding or growing their businesses.
Opportunities with low income potential and high costs are often rejected by business
owners.

Investment Decisions
External business stakeholders often use accounting information to make investment
decisions. Banks, lenders, venture capitalists or private investors often review a
company’s accounting information to review its financial health and
operational profitability. This provides information about whether or not a small
business is a wise investment decision. Many small businesses need external financing
to start up or grow. The inability to provide outside lenders or investors with
accounting information can severely limit financing opportunities for a small
business.
Why ethics is a fundamental business concept

Accounting Principles: Why ethics is a fundamental business concept

Accounting is an information system that identifies, records, and communicates the economic
events of an organization to interested users. Because of the confidential nature to which the
creating and maintaining of these reports are handled, honesty and integrity are highly regarded
traits to the hospitality professional accountant. Professional ethics, or the standards of conduct
to which actions are judged to be right or wrong, depends on the honesty of the individuals you
deal with as a manager of a business.

For this paper, assume you are the Director of Operations for a hypothetical chain of 24 mid-
service roadside motels. The CEO of the chain has sent you a memo stating that he would like to
replace the current accounting firm that handles all the operational accounting for the firm. The
reason he has decided that their services are no longer needed was not made evident to you in the
memo. However, you suspect it may have something to do with the fact that their accounting
practices were brought up as “questionable” at last month’s operations meeting, where last cycles
income statements were openly discussed and examined by upper management.
The CEO further outlines in his memo that he wishes for you to begin researching new
accounting firms. Write a letter addressed to the CEO, Days Inn of America outlining how you
propose to value ethical conduct when interviewing prospective companies. In your letter, you
should include / address the following areas:

1. Your “personal” philosophy on ethics as a fundamental business concept

2. How you plan on identifying and analyzing the principle elements of business ethics within
the prospective accounting firms (be specific)
3. How you plan to ensure the non-ethical conduct of the previous firm will not happen again
(internal control measures) specifically under three headings:
a. Cost analysis
b. Analysis of new contracts
c. Participation in efforts to control expenses efficiently
4. An analysis of what challenges you anticipate facing during this project

Your letter should be 3-5 pages (not including reference and title pages). Use Arial or New
Times Roman 11 font size, single spaced, and proper APA sixth edition formatting.

Letter should contain no more than 20% direct citations or quotations from external cites. That
means 80% should be your own analysis, thoughts, and ideas.

What is an 'Accounting Standard'

An accounting standard is a principle that guides and standardizes accounting practices.

The Generally Accepted Accounting Principles (GAAP) is a group of accounting standards
widely accepted as appropriate to the field of accounting necessary so financial statements are
meaningful across a wide variety of businesses and industries. An accounting standard is a
guideline for financial accounting, such as how a firm prepares and presents its business income,
expenses, assets and liabilities, and may be in accordance to standards set by the International
Accounting Standards Board (IASB).

History of Accounting Standards

The first accounting standards were developed in the 1930s. They were established for public
entities and included in multiple securities acts that followed the Great Depression. The initial
regulations established were included in the Securities Act of 1933 and the Securities Exchange
Act of 1934. These technical pronouncements have ensured transparency in reporting and set the
boundaries for financial reporting measures.

Financial Statement Comparability

Accounting standards ensure the financial statements from multiple companies are comparable.
This is because all entities follow the same rules. Without accounting standards, there is little
consistency as to the reporting of financial information. Accounting standards make the financial
statements credible and allow for more economic decisions based on accurate and concise
information.
Overseeing Bodies

The American Institute of Certified Public Accountants (AICPA) developed, managed and
enacted the first set of accounting standards. In 1973, these responsibilities were given to
the Financial Accounting Standards Board (FASB). As of May 2016, the Financial Accounting
Standards Board still maintains regulation and administration on accounting standards.

Various Standards/Principles

Generally Accepted Accounting Principles are heavily used among public and private entities in
the United States. The rest of the world primarily uses International Financial Reporting
Standards (IFRS). These standards are required to be used for multinational entities. Accounting
standards have also been established by the Governmental Accounting Standards Board (GASB)
for accounting principles for all state and local governments.

What is 'Accounting Measurement'

The computation of economic or financial activities in terms of money, hours or other units. An
accounting measurement is a unit of some measurable element that is used to compare and
evaluate accounting data.

Accounting is often measured in terms of money; for example, when a company records weekly
sales at $10,000. The same company could record those transactions in terms of units sold; for
instance 5,000 units (of $2.00 products).

Monetary Unit assumption

The monetary unit assumption assumes that all business transactions and relationships can be
expressed in terms of money or monetary units. Money is the common denominator in all
economic activity and financial transactions. That is why we assume that money is a good basis
for comparing companies and other accounting measurements. In other words, accounting looks
at transactions that can be communicated in money or monetary units.
GAAP assumes that the monetary unit is stable, reliable, relevant, and useful to all companies. It
is also universally available. All currencies are openly exchanged in world markets with varying
exchange rates. Monetary units like the US dollar and English pound can be easily exchanged for
the European Union Euro, Mexican peso, or the Japanese yen.

Currently the FASB does not recognize the affects of inflation in financial reporting. This is
mainly because the US has enjoyed low inflationary rates for decades. If the US economy
changes and the US inflation rates become hyperinflationary similar to countries like Brazil and
South Africa, the FASB might change SFAC No. 5 which states that the US dollar is expected to
be used for financial statements in the future.

Examples

– A manufacturing plant is started in 1955. It acquires a piece of land and builds a small factory
on the land costing $50,000 in 1955. Today, this piece of land and building is worth over
$1,000,000 because of inflation. The monetary unit assumption does not take into consideration
inflation. The balance sheet of this company will still show the land and building at historical
cost unadjusted for inflation.

– During the middle of the night a retailer’s store is vandalized. The sign is spray-painted over,
the windows are broken, and some merchandise is stolen. The retailer’s financial statements will
only report a loss on the damaged property. It will not report lost potential sales due to down
time wait for repairs or additional inventory because of the monetary unit assumption. Lost sales
are hypothetical and can’t be measured in real monetary units.

– One of Nike’s famous athletes is caught in a scandal and many people stop buying Nike
products in protest of the athlete. Nike does not report a loss at all on its financial statements
because of the monetary unit assumption. Since a boycott involves no business transactions, the
monetary unit dictates that Nike shouldn’t report anything.
Economic Entity Assumption

Definition: The economic entity assumption is an accounting principle that states that all
transactional data associated with a specific entity is assumed to be clearly attributed to the
entity, and does not include other transactional data associated with the entity’s owners or
business partners. While this assumption applies to all varieties of businesses, it most notably
applies to sole proprietorships, for which the transactional records are maintained by the entity’s
owners.

What Does Economic Entity Assumption Mean?

What is the definition of economic entity assumption? Simply put, the business entity
principle allows users of an entity’s financial statements to feel confident that the transactional
data is not tainted by the inappropriate mixing of business and personal finances.

The users of the financial statements can reasonably assume that the detailed transactional data
that supports the financial statements belong to the specific entity, and no other transactions that
may be associated with the owner(s) or other affiliates of the business are included.

Let’s taka quick look at an example.

Example

Let’s say your friend owns his own bicycle shop. The shop not only sells bicycles and maintains
inventory of various bicycle models, but it also performs a variety of services to ensure all
bicycles purchased by its customers stay in great shape. Your friend has a successful business
selling and working on bicycles, and he’s extremely passionate about the success of his business.

Not only does your friend enjoy operating his bicycle shop, but he also loves to ride his own
bicycles around town. When you visit him at his home, he has a beautiful collection of bicycles
that he himself owns, and everyone takes great joy in admiring his amazing collection.

One day, an older gentleman getting his bicycle serviced at the shop, hears about a classic
bicycle that your friend personally owns. He approaches your friend with an offer to purchase the
bicycle from him. Your friend agrees, and he sells the man the classic bicycle for $5,000. The
question is, where should your friend recognize the $5,000 transaction?

Since the transaction was personal, the $5,000 should never impact the financial records of the
bicycle shop. The classic bicycle, owned personally by your friend, was never part of the bicycle
shop’s inventory, and therefore the $5,000 sale should never inappropriately inflate the sales
records of the bicycle shop’s profit & loss statement. Personal and business finances should
always be separated.

Summary Definition

Define Economic Entity Assumption: Business entity concept means that the company and its
owners are separate entities and should be recorded as separate in the financial records.