BASIC CONCEPT of ACCOUNTING and FINANCIAL REPORTING

1 ACCOUNTING and BUSINESS OPERATIONS CHAPTER ACCOUNTING and BUSINESS OPERATIONS 1 A. The Definition of Accounting and Its Purposes Accounting can be defined from at least two point of views: It can emphasize the uses in which accounting information is put. It can emphasize the activities of accountants or accounting process.

Emphasis on use a discipline which provides ….. Accounting has been defined as: a discipline which provides ….. essential information to the efficient conducting and evaluation of the activities of any organization or financial transaction.

What is Accounting? The central of accounting is the organization (business firm). Accounting information is vital to a business firm’s activity. It is used for decision making by inside (management) and outside (investors, creditors, etc) of the organization.

Emphasis on activity In the second definition the work of the accountants is emphasized In accounting ….. the effects of the economic activities of an enterprise are accumulated, analyzed, quantified, classified, recorded, summarized, and reported as information.

Accountant Must be Identifying data are relevant to the decision to be made. Processing or analyzing the relevant data. Transforming data into information that can be used in making better decision.

B. The Role and Users of Accounting Information Accounting information is used as source of information for decision making. Financial accounting information usually is directed toward the common needs of a wide variety of users.

The Users of Accounting Information Managers. Accounting information is used by managers to help them for making a plan of company’s activities, evaluating, and making correction. Investors or owners. They need the accounting information for decision making to decide whether to keep or give up their ownership interests.

Creditors. Accounting information will help them decide whether to extend credit to the firm (let the firm obtains goods, services, or cash with postponed payment). Governmental bodies. They need an accounting information for evaluating tax returns and checking whether the firms are following governmental rules, regulations, and laws.

Non profit organizations Non profit organizations. They need accounting information to help them make a plan, budget and pay many expenses, like salaries, utilities expenses, etc. Others (labor unions, customers of the firm, etc). An accounting information is needed to help them negotiate (discuss arrange) labor contracts, follow the development of the company or make a wide variety decision and make decisions about possible future relationship.

C. The Accounting Profession There are two broad fields in which a professionally trained accountant can employ his services: Public accounting Internal accounting

Public Accounting It concerned to accounting services for public society Licensed professionals engaged in the practice of public accounting are called Certified Public Accountant (CPA) The most important service performed by public accountants is auditing of company’s financial statement

Others activities of public accountants are handling tax, accounting information system, etc All CPAs are not necessarily engaged in the practice of public accounting Some of CPAs can be employees of firms or teachers or working for governmental bodies or other profession.

Internal Accounting Accountants employed by individual business firms are engaged in private accounting. They are called internal accountant or private accountant A number of different services that private accountants perform are controller, bookkeeper, cost accountants, internal auditor, tax specialist, and budget former

D. The Fields of Accounting Specialization 1. Financial/ general accounting It produces financial information which is prepared in the financial statement Users of these information are external decision maker. They are company’s owners, creditors, government, employees, and customers of the company

2. Cost accounting This field generate the information of various costs in the manufacture and sale of the firm’s goods The main category of information needed by management is to be a plan and control for daily company activities These information will be used to make both long term and short term plan and

3. Management accounting There are three function in management accounting activities, that are: To choose and plan data To analysis data To prepare report for management A product of management accounting is management report

4. Auditing Auditing is the field of accounting related by audit activities to notes of financial accounting product An audit is simply an investigation and study of the financial statement and reports prepared by a firm to determine if these reports are prepared according to generally accepted accounting principles (GAAP)

5. Tax accounting It’s concerned with determining tax expense of the company. It can help the company to choose their activities by management’s judgment

It describes and explains to collect and process: 6. Budgetary accounting It describes and explains to collect and process: data of financial operation in the past time the predicted of data in the future time Determined the planning of company’s financial operation (budget) in the certain time or one year

7. Governmental accounting Some government in the world employed accountants help administer the monetary of the country.

E. Description of Business Firms In terms of what they produce for society, business firms can be divided into 2 (two) main types of the firms. Those that goods  merchandising firms and manufacturing firms Those that produce services  service companies

a. 1. Merchandising firms A Merchandising firm buys goods which are already in salable form and sell them to their customers to make profit. For example: grocery stores (Carrefour, Alfamart, Hero, etc)

a. 2. Manufacturing firms A manufacturing company obtains raw materials and supplies of various kinds and then turns these raw materials into a different finished product For example: cigarette enterprise, like Gudang Garam, Ltd, Co.

b. Service Firms The service firms produce services and sell them to their customers to make a profit. They don’t produce tangible goods For example: hotel, travel bureau, etc

F. The Form of Company Organization Most businesses can be classified by their legal form of organization into 3 (three) group: The proprietorship The partnership The corporation

a. The proprietorship It is the simplest kind of organization and usually the smallest This is a business organization with just one owner It is not difficult and not necessary too much money to manage them It has limited sources of fund. It comes from an individual owner

b. The partnership It is a form of organization that is only slightly more complex than a proprietorship The owners – the partners – are simply two or more individuals who combine their efforts to meet common goals The sources of fund in this company come from some owners

c. The corporation The formers of the corporation have to attend a government regulation The corporation issues stock certificates which are written evidence of the owners’ (stockholders’) investment This company can has a large number of investors – owners to invest their money in the corporation and thereby raise capital for it