Accounting: An Information System for Resource Allocation

Section 1: Collecting and Organizing Information

Accounting is an information system that reports on the economic activities and financial condition of a business or other organization.

1.1 Identifying the Ways Accounting Benefits Society

Accounting provides information that helps answer questions such as:

• How should society allocate its resources?
• Should we spend more money to harvest food or cure disease?
• Should we build computers or cars?
• Should we invest money in IBM or General Motors?

Market-Based Allocations

A market is a group of people or entities organized to exchange items of value. Common terms for the added value created in the transformation process include profit, income, and earnings.

Financial Resources

Businesses need financial resources (money) to establish and operate their businesses. Investors and creditors provide these resources.

Physical Resources

Physical resources are natural resources. Owners of physical resources seek to sell those resources to profitable businesses which are able to pay higher prices and make repeat purchases.

Labor Resources

Labor resources include both intellectual and physical labor. Workers seek relationships with businesses that have high earnings potential because these businesses are better able to pay high wages.

Types of Accounting Information

• Financial Accounting: Focused on the needs of external users
• Managerial Accounting: Focused on the needs of internal users

Nonbusiness Resource Usage

Not all entities allocate resources based on profitability. Organizations that are not motivated by profit are called not-for-profit entities. Governments allocate resources for national defense, to reallocate wealth, or to protect the environment. Foundations, religious groups, and various benevolent organizations allocate resources based on humanitarian concerns.

Careers in Accounting

• Public Accounting: Certified Public Accountant, Audit services, Tax services, Consulting services
• Private Accounting: Certified Management Accountant, Certified Internal Auditor

Accounting Improves Communication

Accountants establish measurement and reporting rules that businesses use to facilitate communication.

Focus on International Issues

Until recently, each country developed its own unique Generally Accepted Accounting Principles (GAAP). Global companies were required to prepare multiple sets of financial statements.