FABM1 Week 1 Grade 11 Definition, Nature, History and Users of Accounting information

Summary

This script offers an insightful overview of accounting, defining it as a service activity and information system integral to economic decision-making. It delves into the nature of accounting, tracing its historical evolution from ancient civilizations to modern practices, highlighting the significance of double-entry bookkeeping and the establishment of accounting standards. The script also distinguishes between internal and external users of financial statements, emphasizing the importance of both qualitative and quantitative information in aiding various stakeholders, including managers, employees, owners, investors, creditors, and regulatory authorities, in making informed decisions.

Takeaways

• 📊 Accounting is defined as a service activity that provides primarily financial information about an economic entity to aid in economic decisions.
• 🔢 It is an information system that measures, processes, and communicates financial information, often referred to as the 'language of business'.
• 🎨 Accounting is both an art and a discipline, involving creativity and skill in recording, classifying, and summarizing financial data.
• 🏛 The history of accounting is as old as civilization, evolving with social and economic needs and significantly influenced by the development of double-entry bookkeeping in the 14th century.
• 👨‍🏫 Luca Pacioli is recognized as the father of accounting, with his work on double-entry bookkeeping being a pivotal moment in the field.
• 🌐 The Industrial Revolution brought a focus on the importance of assets and the need for more sophisticated accounting practices.
• 📜 The formal accounting profession emerged in the 19th century, with the granting of a royal charter to The Institute of Accountants in Glasgow, Scotland.
• 🌍 The 20th century saw the development of modern accounting standards and the globalization of the accounting profession, with a push towards observing International Accounting Standards.
• 🏢 Internal users of accounting information are those within a company who use financial reports for planning, organizing, and running the business.
• 👥 External users are individuals and organizations outside the company who require financial information for various purposes, such as potential investors and creditors.
• 📈 Accounting information encompasses both financial (quantitative) and non-financial (qualitative) data, which is crucial for comprehensive decision-making.

Q & A

What is the primary purpose of accounting according to the American Accounting Association (AAA)?

The primary purpose of accounting, as defined by the AAA, is to provide quantitative, primarily financial, information about an economic entity that is intended to be useful in making economic decisions.

How is accounting defined by the American Institute of Certified Public Accountants (AICPA)?

According to the AICPA, accounting is an art of recording, classifying, and summarizing in a significant manner, and in terms of money, transactions and events which are of financial character, and interpreting the results thereof.

What are the basic features of accounting as a service activity?

As a service activity, accounting provides assistance to decision makers by providing financial reports that guide them in making sound decisions.

What does the term 'process' imply in the context of accounting?

In accounting, 'process' refers to a method of performing specific tasks step by step according to objectives or targets, which includes collecting, processing, and communicating financial information.

Why is accounting considered both an art and a discipline?

Accounting is considered both an art and a discipline because it involves the creative and skillful recording, classifying, and summarizing of financial data, while also adhering to certain standards and professional ethics.

How old is the practice of accounting according to the script?

The practice of accounting is as old as civilization itself, having evolved in response to various social and economic needs.

Who is often considered the father of modern accounting and why?

Luca Pacioli is often considered the father of modern accounting because he is credited with the development of double-entry bookkeeping, which is a fundamental concept still in use today.

What significant event in the 14th century greatly influenced the development of accounting?

The significant event in the 14th century that greatly influenced the development of accounting was the invention of double-entry bookkeeping by Luca Pacioli.

What is the role of internal users of accounting information within a company?

Internal users of accounting information are individuals within a company who use financial data to manage and operate the business, including making informed decisions about company performance, resource allocation, and financial planning.

What are the two main categories of external users of accounting information?

The two main categories of external users of accounting information are potential investors and creditors, who use this information to evaluate the financial health and creditworthiness of a company.

How does accounting information support the decisions of management, employees, and owners?

Accounting information supports the decisions of management by providing insights into company performance and cash flow, employees by offering data on job security and compensation, and owners by supplying information on profitability and business assets for investment and expansion decisions.

What types of information do external users need from a company's financial statements?

External users need both financial (quantitative) and non-financial (qualitative) information from a company's financial statements to assess the company's financial health, make investment decisions, and evaluate the risk of granting credit.

Why is it important for accounting professionals to observe International Accounting Standards?

Observing International Accounting Standards is important for accounting professionals to ensure transparency, reliability, and to gain greater confidence in the financial information used by global investors, thus facilitating cross-border financial data comparability.