The Accounting Environment

Read this chapter, which discusses how to define accounting and what the result of accounting (accounting information) is used for. It also considers potential employment opportunities associated with accounting for business and the difference between financial and managerial accounting.

This chapter also introduces the Generally Accepted Accounting Principles, or GAAP, and the various organizations that have a significant impact on how GAAP is administered, including the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the American Accounting Association (AAA).

It is essential to be ethical in applying accounting principles and managing your reputation. Be mindful of this, especially if you are considering a career in accounting.

Learning objectives

After studying this introduction, you should be able to:

  • Define accounting. 
  • Describe the functions performed by accountants. 
  • Describe employment opportunities in accounting. 
  • Differentiate between financial and managerial accounting. 
  • Identify several organizations that have a role in the development of financial accounting standards.
You have embarked on the challenging and rewarding study of accounting - an old and time- honored discipline. History indicates that all developed societies require certain accounting records. Record-keeping in an accounting sense is thought to have begun about 4000 BCE.

The record-keeping, control, and verification problems of the ancient world had many characteristics similar to those we encounter today. For example, ancient governments also kept records of receipts and disbursements and used procedures to check on the honesty and reliability of employees.

A study of the evolution of accounting suggests that accounting processes have developed primarily in response to business needs. Also, economic progress has affected the development of accounting processes. History shows that the higher the level of civilization, the more elaborate the accounting methods.

The emergence of double-entry bookkeeping was a crucial event in accounting history. In 1494, a Franciscan monk, Luca Pacioli, described the double-entry Method of Venice system in his text called Summa de Arithmetica, Geometric, Proportion et Proportionate (Everything about arithmetic, geometry, and proportion). Many consider Pacioli's Summa to be a reworked version of a manuscript that circulated among teachers and pupils of the Venetian school of commerce and arithmetic.

Since Pacioli's days, the roles of accountants and professional accounting organizations have expanded in business and society. As professionals, accountants have a responsibility for placing public service above their commitment to personal economic gain. Complementing their obligation to society, accountants have analytical and evaluative skills needed in the solution of ever-growing world problems. The special abilities of accountants, their independence, and their high ethical standards permit them to make significant and unique contributions to business and areas of public interest.

You probably will find that of all the business knowledge you have acquired or will learn, the study of accounting will be the most useful. Your financial and economic decisions as a student and consumer involve accounting information. When you file income tax returns, accounting information helps determine your taxes payable. Understanding the discipline of accounting also can influence many of your future professional decisions. You cannot escape the effects of accounting information on your personal and professional life.

Every profit-seeking 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, this text concentrates on accounting for business firms.

The accounting system of a profit-seeking business is an information system designed to provide relevant financial information on the resources of a business and the effects of their use. Information is relevant if it has some impact on a decision that must be made. Companies present this relevant information in their financial statements. In preparing these statements, accountants consider the users of the information, such as owners and creditors, and decisions they make that require financial information.

As a background for studying accounting, this Introduction defines accounting and lists the functions accountants perform. In addition to surveying employment opportunities in accounting, it differentiates between financial and managerial accounting. Because accounting information must conform to certain standards, we discuss several prominent organizations contributing to these standards. As you continue your study of accounting in this text, accounting - the language of business - will become your language also. You will realize that you are constantly exposed to accounting information in your everyday life.

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