Course is BBA 2201, Principles of Accounting I

Hello, I need assistance with this Unit I Question- Reflect on how accounting impacts your everyday life. Give an example of a time in your life (or the life of a family member or friend) when accounting affected the outcome of a decision. After reading this chapter, would you have made a different decision? I am having difficulty relating to this because I have no experience in the business environment or with accounting.

Course is BBA 2201, Principles of Accounting I

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UNIT I STUDY GUIDE

Accounting and the Business Environment

Unit Lesson

Accounting and the Business Environment

It has been said that accounting is the language of business. This is a good analogy because learning accounting can sometimes feel like learning a foreign language. In all walks of life, we use accounting to communicate our financial condition. For example, in our daily individual lives, we communicate our financial condition by the amount of cash we have or the amount of cash available in our bank accounts. In a similar fashion, businesses communicate their financial condition by the amount of cash they have on hand or in their bank accounts, how much they have invested in fixtures or equipment, how much they owe to suppliers, and how much they owe to banks or other financial institutions.

Accounting is at the heart of all financial information. Accounting, according to Hoyle and Skender, it displays the financial health and prospects of a business or organization in a way that can be understood and assessed by individuals. Information is a key term in relation to accounting; financial accounting and information are related in many aspects from gathering financial information to applying that information to problems.

In today’s world, information is king.

The bank uses double-entry accounting to keep accurate records of the amount of funds in their customers’ accounts. All businesses must use accounting to record their transactions and report the financial condition accurately to investors and creditors.

There are two basic users of accounting information—internal and external. Internal users of accounting information are the employees, supervisors, managers and executives of a business. External users of accounting information are the vendors, suppliers, insurance companies, banks, and shareholders.

These two users have unique needs for their accounting information. Internal users need to know actual costs versus budgeted costs, comparisons of actual performance to budgeted performance, and information to make decisions about investing in equipment or new locations. External users need accounting information to make decisions about investing in the company (if the company is capable of giving a return on the investment), or lending funds to the company (if the company is capable of repaying the loan).

The field of accounting that provides information to internal users is referred to as managerial accounting. The field of accounting that provides information to external users is referred to as financial accounting. Due to the need for accountability and accuracy in reporting to external users, the field of financial accounting has the most oversight from regulatory bodies. The main governing body for financial accounting is the Financial Accounting Standards Board (commonly referred to as the FASB). Many accountants who pursue a career in financial accounting will sit for the CPA certified public accountant (CPA) exam so that they can become certified and licensed as a Certified Public Accountant (CPA).CPA. Certified professionals who pursue a career in the field of managerial accounting will sit for the certified managerial accountant (CMA) exam so that they can be distinguished as a as a Certified Managerial Accountant (CMA) (Miller-Nobles, Mattison, & Matsumura, 2016).

Becoming licensed, and/or certified, as a CPA or CMA, can lead to a financially secure career. To examine the different accounting positions and the salary ranges, look at Exhibit 1-3, located on page 5 of your textbook.

As stated earlier, the governing agency for the accounting profession is the FASB. The FASB issues accounting guidelines (referred to as accounting principles) that formulate the rules that accountants must follow in recording and reporting accounting information. The rules issued by the FASB are known as Generally Accepted Accounting Principles, more commonly referred to as GAAP. These principles are necessary so that there will be consistency in the reporting of financial information from one company to the next. Investors and creditors can gain a certain level of assurance that the financial information being reported is fair, relevant, and accurate.

In this unit, you will learn and review some of the basic accounting principles and assumptions. One such principle is the cost principle. This principle states that assets should be recorded at their original cost. In other words, if the asset had a fair market value greater than the cost to acquire the asset, then the asset must still be recorded at cost. Additionally, if the asset appreciates in value in later years, the asset is still recorded at the original cost.

This is one accounting principle that many never fully embrace. Consider this scenario, a CPA practice is located not far from the Alabama coastline and has several clients with businesses and locations along the Gulf Coast. In one particular situation, some clients were trying to secure a substantial loan to expand their business. They had a building on their balance sheet that they purchased in the 1960s for less than $100,000. Today, that building has a fair market value in excess of $1,000,000! Here, an accountant had to help the clients explain to their banker that the business’ net worth was much greater than what was being reported in their balance sheet. Fortunately for this client, the banker was understanding and agreed to the higher value for the building (after having the building professionally appraised).

Although this is one example in which the accounting principles and assumptions can be misleading, the GAAP are critical to insure that all accountants and all businesses value and report financial transactions in a consistent manner.

After completing this unit, you will be able to describe the accounting equation and define assets, liabilities, equity, revenue, and expenses. You will understand how financial statements are prepared and reported and how to analyze financial statements using return on assets (ROA) to evaluate the performance of a company.

References

Hoyle, J., & Skender, C. J. (2009). Financial accounting, v. 1.0. Retrieved from http://catalog.flatworldknowledge.com/bookhub/reader/11?e=hoyle-ch01#hoyle-ch01_s01

Miller-Nobles, T., Mattison, B., & Matsumura, E. M. (2016). Horngren’s accounting (11th ed.). Boston, MA: Pearson.

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