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7-2 Accounting [CH 7

Chapter Overview

Accountants are often derided in pleasant conversation as “the bean counters” of an
organization. Often, they are portrayed as that pale, bookish person dressed in a white
shirt and tie, seated behind his desk with pencil in hand, reviewing each invoice and

Enron Corporation was an making notations, then sending those invoices to the bookkeeper for data entry into the
American energy, General Ledger and posted to the specific accounts. Accountants are responsible for
commodities, and services the business reports on income and expenses, verifying the reliability of balance sheets
company founded in 1985 and answering the business questions for management and owners alike.
with the merger of Houston
Natural Gas and InterNorth. Accounting is an old profession because of business transactions that are recorded
Before its bankruptcy on and analyzed. Accounts of transactions have been found on Babylonian tablets,
December 3, 2001, Enron Egyptian papyrus scrolls, Hebrew scrolls, and on Mayan forms. Our modern balance
employed approximately sheet had its beginnings in the spice trade across Asia. Today, when a corporate
29,000 staff and was a
major electricity, natural director abuses the accounting system, the corporate reputation and stock are adversely
gas, communications and affected, as with Arthur Anderson Accountancy and Enron.
pulp and paper company, Though the principles of accounting are the same for the individual as they are for
with claimed revenues of Ford Motor Company, they all involve the same things: a balance of records that
nearly $101 billion during
2000. At the end of 2001, it indicate accuracy. Accounting tasks may be performed with pencil and paper or aided
was revealed that Enron's by computers. Computer programs, reasonably priced, assist the individual
reported financial condition households, small business and large corporations.
was sustained by an From an occupational standpoint, the accounting profession offers many
institutionalized, systemic
and creatively planned opportunities. The U.S. Bureau of Labor Statistics reports that accounting is a fast-
accounting fraud, known growing occupation, estimating that almost 450,000 new accounting jobs will be
since as the Enron scandal. available during the 21 century. Job availability and the relatively high starting
st
The scandal also brought salaries for talented accounting graduates entice thousands of students into accounting
into question the accounting
practices and activities of classes in our colleges and universities. Today, accounting represents almost half of all
many corporations in the student majors in many collegiate business programs.
United States and was a Successful entrepreneurs and business people attest that a basic understanding of
factor in the enactment of accounting principles is an essential business tool.
the Sarbanes–Oxley Act of
2002. The scandal also Accounting is the language of business. It is the process of identifying, measuring,
affected the greater interpreting, and communicating financial information for informed internal and external
business world by causing decision making. If one anticipates a career in business, then he needs to speak the
the dissolution of the Arthur language of business.
Andersen accounting firm, Over the years, accounting has become standardized, but there are always transactions
which had been Enron's
main auditor for years. that must be understood in accounting terms, and conformed to the rules of accounting.
Accountants establish a system to gather, record, report, and interpret financial information
that describe the status of an operation or a firm and aid in decision making. All businesses
Accounting: The keeping must keep their records, just as George Washington kept his farm accounts, carefully and
or preparation of financial accurately. Good accounting must accomplish three major tasks: accurate record keeping,
records of transactions of calling attention to problems and opportunities, and aiding in decision making.
the firm, measuring, This chapter discusses how businesses use accounting information, process it, and
verifications, interpreting, explain the development of accounting statements from financial transactions.
and communicating
financial information for Methods of interpreting these statements are described and the role budgets have in
informed internal and exter- planning and controlling is explained. Remember that the principles of accounting are
nal decision making. just as necessary for the individual as they are for the Kellogg Company.

Who uses Accounting?

Accounting is defined by the American Accounting Association as “the process of
George Washington kept identifying, and communicating economic information that permits and facilitates
his farm accounts — informed judgments and decisions by users of information.”
carefully and accurately.
George Washington was Accounting can be divided into two categories: Financial accounting and
better able to serve his managerial accounting. These categories differ according to the people they serve.
country because he was Financial accounting is intended primarily for use by external decision makers (such as
financially independent. investors, creditors, and the Internal Revenue Service). Managerial accounting is
Encourage thrift and build
up your financial standing mainly used by internal decision makers such as company managers. Accounting
through savings and information helps them plan and control both daily and long‑range operations. Owners
investments. of the firm rely on accounting data to determine how well the firm is being operated.
Union officials use the data in contract negotiations when negotiating with publicly

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