Understanding Business Accounting For Dummies, 2nd Edition (6 page)

Accounting Everywhere You Look

Accounting extends into virtually every walk of life. You're doing accounting when you make entries in your cheque book and fill out your income tax return. When you sign a mortgage on your home you should understand the accounting method the lender uses to calculate the interest amount charged on your loan each period. Individual investors need to understand some accounting in order to figure the return on capital invested. And every organisation, profit-motivated or not, needs to know how it stands financially. Accounting supplies all that information.

Many different kinds of accounting are done by many different kinds of persons or entities for many different purposes:

Accounting for organisations and accounting for individuals.

Accounting for profit-motivated businesses and accounting for non-profit organisations (such as hospitals, housing associations, churches, schools, and colleges).

Income tax accounting while you're living and estate tax accounting after you die.

Accounting for farmers who grow their products, accounting for miners who extract their products from the earth, accounting for producers who manufacture products, and accounting for retailers who sell products that others make.

Accounting for businesses and professional firms that sell services rather than products, such as the entertainment, transportation, and health care industries.

Past-historical-based accounting and future-forecast-oriented accounting (that is, budgeting and financial planning).

Accounting where periodic financial statements are mandatory (businesses are the primary example) and accounting where such formal accounting reports are not required.

Accounting that adheres to cost (most businesses) and accounting that records changes in market value (investment funds, for example).

Accounting in the private sector of the economy and accounting in the public (government) sector.

Accounting for going-concern businesses that will be around for some time and accounting for businesses in bankruptcy that may not be around tomorrow.

Accounting is necessary in any free-market, capitalist economic system. It's equally necessary in a centrally controlled, socialist economic system. All economic activity requires information. The more developed the economic system, the more the system depends on information. Much of the information comes from the accounting systems used by the businesses, individuals, and other institutions in the economic system.

The Basic Elements of Accounting

Accounting involves bookkeeping, which refers to the painstaking and detailed recording of economic activity and business transactions. But
accounting
is a much broader term than
bookkeeping
because accounting
refers to the design of the bookkeeping system. It addresses the many problems in measuring the financial effects of economic activity. Furthermore, accounting includes the
financial reporting
of these values and performance measures to non-accountants in a clear and concise manner. Business managers and investors, as well as many other people, depend on financial reports for vital information they need to make good economic decisions.