“God hates cheating in the marketplace; He loves it when business is aboveboard.”
“The integrity of the honest keeps them on track; the deviousness of crooks brings them to ruin.”
“Without good direction, people lose their way; the more wise counsel you follow, the better your chances.”
Sources:
(1) Accounting Verse – Accounting Basics
(2) OpenStax Textbook – Principles of Accounting Vol.1 (Financial Accounting) = [PoA.1]
(3) OpenStax Textbook – Principles of Accounting Vol.2 (Managerial Accounting) = [PoA.2]
(4) Congress.gov – Sarbanes-Oxley Act of 2002
(5) https://aaahq.org/Education
(6) Best Accounting Software For Small Businesses in 2025– PcMag.com
(7) https://www.gasb.org/
This is Post #1 in the Accounting Series. Post #2 is found here.
All Posts in The Accounting Series will focus on learning accounting principles as practiced within the United States.
Accounting Basics
Accounting is a language of business.
Accounting helps communicate information about an economic entity through various financial statements. An economic entity can be governmental or non-governmental (like a business or non-profit). This financial information is organized, analyzed, and communicated through those in the accounting profession.
Accounting methods can be analyzed in four phases: (1) recording, (2) classifying, (3) summarizing, and (4) interpreting.
Accounting can be considered both an art & an incomplete science, as it requires artistic interpretation & the methods/rules are continuously evolving.
Many non-profits need to communicate important financial information to their board of directors. Corporations involved in the issuance of publicly traded securities require an annual audit by an independent accounting firm. A manager at a local theater may need to know if a certain movie is selling in 3-D better than the normal viewing, or if butter popcorn is more cost efficient than kettlecorn.
Beneath these decisions is a combination of financial and non-financial information.
For instance, different brands of butter popcorn may have different costs per unit, various qualities, textures, expiration dates, or allergy information that all must be considered by our theater manager. The theaters’ most loyal moviegoers may choose this particular theater because of the quality of the butter popcorn and may not appreciate a sudden change in flavor quality.
Accounting information may help estimate that sales would improve by eliminating the different kinds of hotdogs, since they sell the least of all the concession stand foods, and end up being thrown away.
Perhaps the theater manager discovers no other theater in the region offers a variety of popcorn flavors and decides the extra cost of kettlecorn, cinnamon sugar, garlic, and cheese will provide a strategic advantage to their local theater.
The theater manager might also consider the importance of complementary goods. The typical buyer of movie theater popcorn, also compliments that popcorn, with a large Coke.
If the buyer has a family with small children, they may also complement the popcorn & soda with a packaged candy. Therefore, the local theater manager may choose to create a strategic advantage by offering Combo Meals that package the complimentary food choices together in a value deal that no other local movie theater offers.
Two Broad Areas: Financial Accounting & Managerial Accounting
Accounting tends to be divided into two broad areas: (1)
Financial Accounting & (2) Managerial Accounting.
Financial Accounting “measures the financial performance of an organization using standard conventions to prepare and distribute financial reports. Financial accounting is used to generate information for stakeholders outside of an organization, such as owners, stockholders, lenders, and governmental entities such as the Securities and Exchange Commision (SEC) and the Internal Revenue Service (IRS).”1
Financial Accountants typically adhere to formal accounting standards known as generally accepted accounting principles (GAAP). GAAP provides a common set of “rules, standards, and procedures that publicly traded companies must follow when composing their financial statements.” 2
Managerial Accounting “uses both financial and nonfinancial information as a basis for making decisions within an organization with the purpose of equipping decision makers to set and evaluate business goals by determining what information they need to make a particular decision and how to analyze and communicate this information. Managerial accounting information tends to be used internally, for such purposes as budgeting, pricing, and determining production costs. Since the information is generally used internally, you do not see the same need for financial oversight in an organization’s managerial data.”3
Regulatory & Legal Oversight
Several governmental & organizational entities provide oversight in the accounting industry.
Some of them are:
- Securities & Exchange Commission (SEC)
- Financial Accounting Standards Board (FASB)
- American Institute of Certified Public Accountants (AICPA)
- Public Company Accounting Oversight Board (PCAOB)
- Governmental Accounting Standards Board (GASB)
- International Financial Reporting Standards (IFRS)
There are also important acts & laws that should be taken in consideration when learning about accounting.
While these acts & laws may vary depending on country, state, or region, one important United States Act is the Sarbanes-Oxley Act of 2002 (SOX). SOX was created in response to several cases involving major corporate fraud.
The SOX established the PCAOB to: “(1) oversee the audit of public companies that are subject to the securities laws; (2) establish audit report standards and rules; and (3) inspect, investigate, and enforce compliance on the part of registered public accounting firms, their associated persons, and certified public accountants.”4
Established in 1984, the GASB governs & creates accounting standards for the state & local governments of the United States.5 The GASB builds its principles off of GAAP. The GASB is recognized as authoritative by many state & local governments, state Boards of Accountancy, and the AICPA.
The FASB is an independent non-profit that creates financial accounting standards, utilizing GAAP as a guideline, for public & private businesses to utilize.6
The SEC is a federal regulatory agency that issues regulations and provides oversight for financial markets with a goal to “provide investors with access to transparent and unbiased financial information.”7 The SEC shares some of its power with the FASB regarding creating standards for the auditing profession.8
As United States entities interact globally, methods of accounting information can be difficult to translate. As a result of this global interaction, the IFRS was created to establish an international standard that many globally interacting businesses are beginning to implement.9 Even the SEC has provided some allocation for foreign companies—looking to trade on American exchanges— who utilize IFRS methods when turning in required financial reports.10
“The LORD detests dishonest scales, but accurate weights find favor with Him.”
“The integrity of the upright guides them, but the unfaithful are destroyed by their duplicity.”
“For lack of guidance a nation falls, but victory is won through many advisers.”
Internal & External Users
An end goal of accounting is to provide useful information to assist in good decision-making. The users of this useful information are divided into two categories: internal & external.
Internal users “are those within an organization who use financial information to make day-to-day decisions. Internal users include managers and other employees who use financial information to confirm past results and help make adjustments for future activities.”11 Think of business owners, the board of directors, the CFO & the CEO.
External users “are those outside of the organization who use the financial information to make decisions or to evaluate an entity’s performance. For example, investors, financial analysts, loan officers, governmental auditors, such as IRS agents, and an assortment of other stakeholders are classified as external users, while still having an interest in an organization’s financial information.”12 Think of creditors and suppliers potentially extending lines of credit to the business.
As an investor, looking to improve your investment portfolio will often involve looking into a company’s reported & audited financial information like a Form 10-K.
Characteristics & Sources of Financial/Accounting Information
Financial performance is measured in monetary values within a set period of time.
By measuring performance in terms of value, users of accounting information can compare the organization’s performance to different periods & competing companies.
A European company might choose to utilize the euro. An Israeli company reporting in Israeli might measure their financial performance with the shekel. In the United States, the dollar is the standard utilized for accounting.
Different industries & regions may utilize variations of preparation & communication regarding accounting information. Some industries & organizations may utilize external sources from trade groups & economic forecasts when building their financial forms & budgets.
However, in America, accountants generally utilize similar accounting standards to prepare financial information.
Many financial accountants may utilize: an Income Statement, Statement of Owner’s Equity, Balance Sheet, and a Statement of Cash Flows & Disclosures. These reports are often reported quarterly & annually.
Manageral accountants may utilize: job cost sheets, cost of goods manufactured, and production cost reports. These reports are often reported as often as needed.
To various degrees, these records & forms: record & analyze transactions—which quantify value in the activities & events within an economic entity. Many of these transactions are records of historical events & activities that already took place; however, providing future estimates are also a vital aspect of accounting.
These transactions, along with the records & forms, are often created and managed on a computerized accounting system.
Computerized Accounting Systems
Computerized accounting systems help accountants prepare & analyze financial information electronically. While many accountants still utilize Microsoft Excel, there are other computerized accounting systems available.
Common computerized accounting systems include: Intuit QuickBooks, FreshBooks, Sage 50 Accounting, Wave, Zoho Books, Xero, Patriot Software Accounting, SAP, and Oracle.
Each of these computerized accounting systems has various benefits & drawbacks. Each of them can be a best fit for someone. It is beyond the scope of this—author & article—to recommend any particular brand. However, the size & complexity of an organization may require larger, customized software solutions.13
What Does An Accountant Consider?
An accountant often has to consider a variety of information when analyzing & interpreting information to share with appropriate stakeholders.
An accountant should consider the:
- Result of Operations over Period of Time
- Net Income = Income – Expenses
- [Weekly/Monthly/Quaterly/Annually]
- Net Income = Income – Expenses
- Financial Position
- Assets = Resources Company Owns
- Liabilities = Debts to Third Parties
- Capital = Amount after all obligations
- Solvency
- Solvency is the entity’s ability to pay obligations when they become due.
- Liquidity
- Liquidity pertains to the entity’s ability to meet short-term obligations.
- Cash Flows
- Inflows & outflows of cash within various entity activities
- Entity Activities: Operating / Investing / Financing
- Inflows & outflows of cash within various entity activities
- Relevance of Additional Information
- If additional information is relevant to sound decision making, the accountant should include it.
“A false balance is an abomination to the LORD, But a just weight is His delight.”
“The integrity of the upright will guide them, But the perversity of the treacherous will destroy them.”
“Where there is no guidance the people fall, But in an abundance of counselors there is victory.”
- [PoA.1] p.13 ↩︎
- [PoA.1] p.16 ↩︎
- [PoA.1] p.14 ↩︎
- Sarbanes-Oxley Act of 2002 – actual text ↩︎
- [PoA.1] p.23 ↩︎
- [PoA.1] p.16 ↩︎
- [PoA.1] p.28 ↩︎
- [PoA.1] p.29 ↩︎
- [PoA.1] p.31 ↩︎
- [PoA.1] p.32 ↩︎
- [PoA.1] p.14 ↩︎
- [PoA.1] p.14 ↩︎
- [PoA.1] p.15 ↩︎
To continue reading The Accounting Series, click here.
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