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Financial Statements
Accounting Information
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Concept Version 14
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Consumers of Accounting Information

Most of a company's stakeholders consume its accounting information in one form or another.

Learning Objective

  • Explain the history of accounting


Key Points

    • Double-entry bookkeeping first emerged in Northern Italy in the fourteenth century.
    • As companies grew bigger, accounting standards were required for those without firsthand knowledge of operations to be able to understand the finances and operations of the company.
    • Managers, employees, owners, and auditors all desire the information provided by management accounting.
    • On the other hand, external auditors, potential and actual shareholders, creditors, analysts, economists, and government agencies rely on financial accounting statements to provide them with the information they need.

Terms

  • IFRS

    International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.

  • GAAP

    Generally Accepted Accounting Principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards.


Full Text

Early accounts served mainly to assist the memory of the businessperson, and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the fourteenth century, where trading ventures began to require more capital than a single individual was able to invest.

The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information. This development resulted in a split of accounting systems for internal (i.e., management accounting) and external (i.e., financial accounting) purposes and, subsequently, also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.

Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called "management accounting" and is used to provide information to employees, managers, owner-managers, and auditors.

Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called "financial accounting" and provides information to present and potential shareholders and creditors, such as banks or vendors, financial analysts, economists, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting in a given jurisdiction is the Generally Accepted Accounting Principles, or GAAP. Other rules include International Financial Reporting Standards, or IFRS, or U.S. GAAP.

A Sample Income Statement

Expenses are listed on a company's income statement.

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