Introduction: What is Accounting


By the end of this lesson, you will be able to:

  • Define accounting
  • Describe the evolution of accounting
  • Identify reasons for the study of accounting.
  • List various types of accounting activities
  • Identify users of accounting information.
  • Explain the importance of Ethics in business and accounting and the reason for the enactment of the SARBANES OXLEY Act.

Why do we need financial information?

Each business needs financial information to be able to answer the following questions:

  • How much cash does the business need?
  • What is the business' profit or loss?
  • How much should the business sell?
  • What is the cost of goods sold?
  • What are the business' expenses?
  • Do customers owe money to the business?
  • How much money does the  business owe to vendors (suppliers)?

The video below gives a brief overview of many of the topics in this lesson. Before you review the video, consider these questions:

  • What is Accounting?
  • What is Business?
  • Who are the three people that want to know the story of your business?
  • What language of Accounting does the government use?
  • What language of Accounting do Investors use?
  • What language of Accounting do internal users employ?

Every business organization that has economic resources, such as money, machinery, and buildings, uses accounting information. For this reason, accounting is called the language of business. Accounting also serves as the language providing financial information about not-for-profit organizations such as governments, churches, charities, fraternities, and hospitals. However, these entities are not businesses because they do not operate in a for-profit manner. In this course we will focus on accounting for business firms.

The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. Bank officials, for example, may study a company’s financial statements to evaluate the company’s ability to repay a loan. Prospective investors may compare accounting data from several companies to decide which company represents the best investment. Accounting also supplies management with significant financial data useful for decision making.

Financial accounting information appears in financial statements that are intended primarily for external use (although management also uses them for certain internal decisions). Stockholders and creditors are two of the outside parties who need financial accounting information. These outside parties decide on matters pertaining to the entire company, such as whether to increase or decrease their investment in a company or to extend credit to a company. Consequently, financial accounting information relates to the company as a whole, while managerial accounting focuses on the parts or segments of the company.

Managerial accounting information is for internal use and provides special information for the managers of a company. The information managers use may range from broad, long-range planning data to detailed explanations of why actual costs varied from cost estimates. Management accountants in a company prepare the financial statements. Thus, management accountants must be knowledgeable concerning financial accounting and reporting. The financial statements are the representations of management, not the CPA firm that performs the audit.


Answer the following questions to quiz your understanding of the video and the readings. Choose how confident you are, Maybe, Probably or Definitely, to check your answer!

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