Chapter 3 The Art of Accountancy C H A P T E R 3

What Is Accounting? Recording the acquisition of materials Keeping track of inventories Measuring output Analyzing the cost of goods sold Managing the profitability of the company or agency

What Are Transactions? The exchange of goods, services, and money The records of those exchanges in journals and ledgers Recorded in chronological order Assigned account numbers Added up to create account balances

The History of Accounting Ancient accounting originated in Asian and Middle Eastern countries 7,000 years ago. Modern accounting originated in Italy during the Renaissance. Originated as business accounting to keep track of agricultural production and profitability Currently done by computers

Generally Accepted Accounting Principles Expenses are reductions in equity. Expenditures are extinguished cash resources. Revenues are increases in cash resources. Businesses and nonprofit organizations take in revenues and make expenses. Governments take in revenues and make expenditures.

Full Accrual Accounting Used for business and nonprofit accounting Takes into consideration depreciation of fixed assets Generally accepted accounting principles are prescribed by the FASB Records equity on balance sheets

Modified Accrual Accounting Used for nonprofit and government accounting Does not depreciate assets Generally accepted accounting principles are prescribed by the GASB Records fund balance on the balance sheet rather than equity

Accounting Terms You Need to Know Fund balance and equity Depreciation Ledger Journal (continued)

Accounting Terms You Need to Know (continued) T-accounts Debits Credits Codes of ethics and conduct

Equity Versus Fund Balance Both are left over when liabilities are subtracted from assets. Equity represents the value of the company. Fund balances represent value in a specific fund accumulated on behalf of the taxpayers for a specific purpose.

Journal A journal is a book in which transactions are recorded in chronological order. A running balance is kept of the total balance of the fund.

Ledger A ledger is a book in which transactions are recorded by account in chronological order. A running balance of each fund is kept.

T-Accounts The two columns record debits and credits.

Debits Addition of an asset or addition of an expense

Credits Reduction of an asset or reduction of an expense

Paper-Based Accounting The paper books actually exist as described. All calculations are done manually. Reports are constructed from account balances.

Computer-Based Accounting Transactions are recorded in a file in chronological order. Reports are constructed by the computer when commands are provided.

Depreciation Depreciation is a reduction in the value of buildings, vehicles, and equipment due to aging. The life of the capital item must be estimated. The salvage value must be estimated. (continued)

Depreciation (continued) The salvage value is subtracted from the original purchase price. The difference is divided by the number of years. The resulting amount is subtracted from the original cost each year.

Codes of Ethics Codes vary from profession to profession. To truly be a profession, there needs to be a code of ethics. Codes generally define honesty as the best policy. Recording transactions honestly is important in accounting. Ethical dilemmas are about doing the right thing when competing codes are different.

American Institute of Certified Public Accountants’ Code of Ethics Defines integrity Determines that accountants should ask themselves, “Is this what a person with integrity would do?” Applies to the private, nonprofit, and public sectors

Private-Sector AICPA Code Requirements Compliance with laws Fair dealing in competition Protecting the health and safety of the public Reporting any illegal activity Reporting improper influence over auditors

Nonprofit-Sector Codes of Ethics Follow the mission of the agency. Avoid conflicts of interest. Comply with laws. Be fair in dealing with employees. Act in the public interest.

Public-Sector Codes of Ethics American Society of Public Administration –Serve the public interest. –Respect the constitution and laws. –Demonstrate personal integrity. –Promote ethical organizations. –Strive for professional excellence. (continued)

Public-Sector Codes of Ethics (continued) International City/County Management Association –Be dedicated to and affirm the worth of government. –Demonstrate integrity. –Supply elected officials with information on which to make decisions and give them the credit for those decisions. –Refrain from political activities. –Seek no favor or personal aggrandizement. (continued)

Public-Sector Codes of Ethics (continued) National Recreation and Park Association –Adhere to the highest standards of integrity and honesty in all public and personal activities to inspire public confidence and trust. –Strive for personal development of associates and students. –Strive for the highest standards of professional competence, fairness, impartiality, efficiency, effectiveness, and fiscal responsibility. –Avoid any interest or activity that is in conflict with the performance of job responsibilities. –Support equal employment opportunities.

Conflicts in Codes of Ethics and Conduct The NRPA code does not prohibit participation in the political process and is not specific about financial reporting. The ICMA and ASPA codes do prohibit political participation but are not specific about financial reporting. The AICPA code is specific about financial reporting and compliance with laws with its own code of conduct.

Summary Accounting has a language of its own. Leisure services professionals need to learn the language. Financial reporting is fraught with ethical dilemmas. One ethical dilemma is which codes of ethics leisure service financial managers should focus on.