My name is Larry Walther, and this is principlesofaccounting.com Chapter 1.
In this module we're are going to look at the nature of financial accounting and
managerial accounting.
Let me begin with the definition of accounting.
Accounting is a set of concepts and techniques that are used to measure and
report financial information about an economic unit.
The emphasis is on an economic unit, ordinarily.
That would be a corporation, a partnership, a sole proprietorship.
It's important that we're talking about concepts and
techniques within this definition.
You may, at this point in your study of accounting,
be thinking of accounting as primarily bookkeeping or processing.
Certainly the methods or techniques are an important part of accounting, but
beyond that the ideas or concepts that underly accounting become very important
and really form the robust part of the accounting profession.
We also think about how to measure and report,
that's the largest objective of accounting is how to measure and report.
I wanna use this device to demonstrate the point that I'm trying
to make about measuring and reporting.
If you think about the company that deployed the huge investment to put up
the cell towers and create the technology to allow these devices to occur and
the process by which they recover that through sales.
You see you've got a huge investment up front that's going to be recovered later
through a revenue stream, and that revenue stream becomes very complex.
If you perhaps buy an item like this for a nominal amount, $100 or $200 or
$300 that's perhaps well below the company's cost to produce this item and
certainly doesn't consider the huge investment in infrastructure that
supports these devices.
Obviously, the way the companies that sell them recover their money is through
continuing monthly fees or service plans associated with these.
So the customer that buys this at a bargain price
is also expecting to have to pay for a two or three year contract.
And so the question becomes, if you were the company,
the cellular provider in this case, how would you recognize,
how would you measure the revenue for each particular month, or quarter, or year?
And how would that be reported for financial reporting purposes?
Accounting information is useful to business managers, owners, creditors,
governmental units, financial analysts, employees, labor unions, and so forth.
There's a broad group of interested parties in accounting information,
which largely leads to a division of accounting between considering it as
either financial accounting in nature, or managerial accounting in nature.
Financial accounting is targeted towards external users, because external users
don't control the particular information flow that they are receiving,
it is instead based upon standardized rules.
And those rules in the United States were developed by the Financial Accounting
Standards Board, or FASB, or sometimes simply called the FASB.
It's a private sector group, not a governmental group, that's respected and
honored however in terms of reporting practices and procedures.
The FASB's global counterpart is the International Accounting Standards Board.
We often talk about the rules, practices, and procedures that define accepted
accounting practices as simply being generally accepted principles or GAAP.
On a global basis we refer to this as international financial reporting
standards or IFRS.
Recognize that the ISB and the FASB are working on a project of global
convergence that will lead to harmonization of accounting standards as
well as perhaps even the unification of the standard setting bodies into a single
standard setting body at some uncertain future date.
Standardization is very much needed in this age of global exchange and
global investment.
It's simply imperative that all parties play by the same rule book in
terms of preparing and presenting accounting information
to facilitate those global business transactions in a meaningful way.
Managerial accounting is targeted toward specific needs of management.
It's often called internal reporting, or cost reporting.
It has areas of emphasis, business planning,
business controlling, specific decision making.
Should I make a capital investment in new machinery, or
should I simply go along with the machinery I've got?
It is not nearly as structured, there's no particular set of rules that drives or
guides managerial accounting.
It is instead based on the needs of management of a particular company.
Whether we're talking about financial accounting or managerial accounting,
recognize that there's a need for a strong information system to reliably capture and
summarize business information.
So then over the last 20 and 30 years,
we've seen huge strides in the quality and character of information systems.
This has really reshaped accounting.
It's far less of a bookkeeping, record keeping task.
The computer handles much of that now.
It's more dynamic, decision making based discipline, not a bookkeeping task.
There are limitations to accounting that you ought to be aware of up front.
First of all.
it's not a hard science, it is a social science it involves subjective judgments
and estimations that are necessary to develop specific accounting measurements
for particular period of time.
There are interesting issues related to evaluation in accounting.
Should amounts be measured in historical cost or fair value?
Historical cost is basically saying that as transactions and events occur,
we capture the cost at that time, and we maintain that in the accounting records as
a basis of an objective, verifiable, and reliable measure for reporting purposes.
The counter-argument to that is, though, that fair value accounting,
although subjective, it forms a more relevant basis for measurement.
And this is another area where we're gonna see significant changes in accounting over
the next decade or so, in terms of an evolution toward fair value accounting.
So it's a dynamic discipline, and I hope you enjoy your study of accounting.
I hope this first module that differentiates between internal and
external reporting, managerial versus financial accounting is helpful in getting
you off on the right foot in your studies of accounting.