Fundamentals of Accounting Concepts

Accounting Fundamentals

Accounting is often called the language of business. It helps people make decisions.

Types of Accounting

Tax Accounting

Helps determine how much is owed to the government for taxes. Rules are set by the government. Users include businesses and the government.

Managerial Accounting

Helps people inside the business make decisions. There are no strict external rules; it's customized depending on the type of company. Users are typically internal managers.

Financial Accounting

Helps people outside the business make decisions. It produces multi-purpose results and follows established rules (like GAAP or IFRS). Users include investors, creditors, and others.

Functions and Responsibilities of an Accounting Department

• Payroll: Calculate total wages and salaries, handling detailed private information. Determine correct amounts for income tax, social security tax, etc. Update benefits earned by employees.
• Cash Collections: Record and identify money received from sales and other sources. Deposit cash in the proper business accounts. Control who has access to incoming receipts.
• Cash Payments: Write checks to pay for purchases, taxes, loans, and distribute profit. Know when checks should be paid, the amount, and ensure proper signatures.
• Procurement and Inventory: Keep track of orders. Place orders for inventory. Manage purchases on credit and keep files on all liabilities. Maintain detailed records of products and record the cost of goods.
• Property Accounting: Account for long-term assets owned by the business (property, plant, equipment) and small, cost items (like screwdrivers, pencil sharpeners). Maintain detailed records for controlling asset use and determining personal property and real estate taxes.

Accounting Event Types

Business transactions that involve the exchange of money and affect the business's financial situation in a positive or negative way.

• Revenue Events: Involve selling goods or services and collecting payment for those sales.
• Expenditure Events: Involve activities of buying and paying for goods or services used by the organization.
• Human Resource (Payroll) Events: Activities related to hiring and paying employees.
• Production Events: Converting raw materials and labor into finished goods.
• Financing Events: Involve activities of obtaining necessary funds to run the organization, repaying creditors, and distributing profits to investors.

Users of Accounting Information

• Direct Users: People strongly affected by the financial state of the business (e.g., creditors, investors).
• Indirect Users: People not strongly affected by the financial state of the business (e.g., customers, suppliers).