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Introduction to Accounting

 

Introduction

Accounting is the area of a business process that consists of identifying (identification) the monetary transactions of the business, then recording (record) them, and finally communicating (communication) them to whoever has an interest. Each of these three areas is important and meant to address particular separate issues.

Business Accounting, Internally and Externally

Because many parties can show an interest in the accounting processes of a company, accounting is sometimes classified in two categories:

  • Managerial accounting includes corporate and other employees of a company who would be interested to know whether the company is well-maintained so it can afford to give promotions and other internal incentives.
  • Financial accounting addresses the issues that are of interest to people and entities outside the company. These include stock brokers who would be considering buying stocks in the company and would like to know whether the company is viable. Financial accounting is also used by the government or the office that collects taxes. Financial accounting also allows the appropriate government agencies to find out whether the company is following the law.

Regulating the Accounting

Because there are many issues related to accounting but to make sure that all parties involved follow some common standards and rules, some generally accepted accounting principles (GAAP) have been developed. In the US, the central organization used by accountants is the Financial Accounting Standards Board (FASB). Outside of the US, the most common organization used in accounting is the International Accounting Standards Board (IASB).

Accounting involves a great deal of business transactions and money exchange, so much that each government must be able to control these issues among the companies in its country. In the US, the government agency that is in charge or regulating the accounting principles is the Securities and Exchange Commission (SEC).

Processing Accounting

During identification, a business transaction is primarily acknowledged as occurring or as having occurred. For example, imagine you have a company named College Park Auto Repair that is in the business of repairing cars. When a customer brings a car to the shop, this is not considered a business transaction in accounting. On the other hand, when the customer pays the invoice, an accounting-related transaction takes place. In the same way, if the business owner is shopping for a tire rotating machine on the Internet, there is no business transaction going on. When the company purchases the tire rotating machine, a business transaction has occurred and is identified. A business transaction that occurs is called an event.

After a transaction has been identified and classified as valid, it must be recorded. To keep good records, one of the most valuable rules is to enter them in a chronological order, consisting of a date and a way to recognize the transaction.

Considered as documentation, the communication aspect of accounting consists of creating readable records that can be useful to interested parties, including the business owner who would use this documentation to evaluate the evolution of the business, a bank would need to know how risky or not it would be to lend money to the business, the government that would be concerned with taxes. The communication can be provided through a financial statement.

References

Federal Accounting Standards Advisory Board. (2000). Generally Accepted 
Accounting Principles. Retrieved September 13, 2008 from http://www.fasab.gov/accepted.html
 
Securities and Exchange Commission (SEC). (2008). Securities and Exchange 
Commission (SEC). Retrieved September 13, 2008 from http://www.sec.gov/
 
Financial Accounting Standards Board (FASB). (2008). Financial Accounting 
Standards Board (FASB).  Retrieved September 13, 2008 from http://www.fasb.org/
 
International Accounting Standards Board (IASB). (2008). International 
Accounting Standards Board (IASB). Retrieved September 13, 2008 from http://www.iasb.org

 

 

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