From the course: Finance for Non-Financial Managers

What is accounting?

From the course: Finance for Non-Financial Managers

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What is accounting?

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- So what exactly is accounting? Accounting is a system for providing quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. Whew. That definition comes from the AICPA, the American Institute of Certified Public Accountants. Scary. So let's slow down and look at each element of that impressive definition. Well, first, accounting is quantitative. It's numbers. Accounting is all about numbers. Second, accounting is financial in nature. That means money, numbers about money. Third, accounting is meant to be useful. The fundamental purpose of accounting is to be useful. Accounting is a very practical field. Alright, useful for what? Well, that's the fourth aspect of accounting, useful in making decisions. Accounting helps you use information from the past, to make decisions in the present, to change the future. Accounting is a system of assembling money related numbers that are useful in making decisions. Now, under the general umbrella of accounting, there are four general areas. Bookkeeping, financial accounting, managerial accounting, and income taxes. Now first, the most fundamental type of accounting is bookkeeping. Just the routine gathering of the data, making sure that everything gets recorded. So bookkeeping is gathering the data systematically. Second area of accounting is financial accounting. This is reporting to people outside your organization. Summary reports, not the details. Just summary reports to people outside who might be thinking of loaning you money or might be thinking of investing in your company. That's called financial accounting, reporting to outsiders. The third area of accounting is managerial accounting. These are the detailed secret data that individuals use inside their organizations to make decisions. Detailed decisions. Should I raise my prices? Should I stop selling shirts and start selling shoes instead? Should I build my factory in Wyoming or should I build it in Alabama? The detailed information used in making decisions such as these is called managerial accounting. And finally, the fourth kind of accounting is income tax accounting. This is the accounting that we use to make sure that we are in compliance with the income tax laws. So those are the four types of accounting. Bookkeeping, financial accounting, managerial accounting, and income taxes. Both accounting and finance deal with using numbers to make better, more informed decisions. The numbers certainly do not drive the decisions, but they provide a significant input into the decision making process. Accounting involves gathering and compiling information for decision makers, both within the company and outside of the company. This accounting information is often used by those in the field of finance to determine what resources are needed and how to best acquire and utilize those resources. Now, accounting and finance do not involve magic. They involve understanding. Our objective here is to help you gain some of that understanding, not so that you can become accountants, but rather so that you can understand and appreciate where those numbers come from and what those numbers are used for. And who knows? Perhaps you'll find that numbers can become your friends.

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