{"id":3235,"date":"2023-02-19T16:12:07","date_gmt":"2023-02-19T16:12:07","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/chapter\/what-is-accounting\/"},"modified":"2025-05-28T14:14:53","modified_gmt":"2025-05-28T14:14:53","slug":"what-is-accounting","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/chapter\/what-is-accounting\/","title":{"raw":"Learn It 16.1.1: What Is Accounting?","rendered":"Learn It 16.1.1: What Is Accounting?"},"content":{"raw":"<section class=\"textbox learningGoals\">\r\n<ul>\r\n\t<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand what accounting is&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:14720,&quot;10&quot;:0,&quot;11&quot;:4,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand what accounting is<\/span><\/li>\r\n\t<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand who uses financial accounting&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:15233,&quot;3&quot;:{&quot;1&quot;:0},&quot;10&quot;:0,&quot;11&quot;:4,&quot;12&quot;:0,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand who uses financial accounting<\/span><\/li>\r\n\t<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand who uses managerial accounting&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:15233,&quot;3&quot;:{&quot;1&quot;:0},&quot;10&quot;:0,&quot;11&quot;:4,&quot;12&quot;:0,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand who uses managerial accounting<\/span><\/li>\r\n<\/ul>\r\n<\/section>\r\n<h2>Why Do We Need Financial Information?<\/h2>\r\n<section>\r\n<div>\r\n<p>In the same way that you track your monthly spending, businesses have large groups of stakeholders who have a vested interest in the continued success of the enterprise. If a business, whether for-profit or nonprofit, becomes financially insolvent and can't pay its bills, it will be forced to close. Financial information enables a business to track its accounts and make informed financial decisions.<\/p>\r\n<p>Each business needs financial information to be able to answer questions such as the following:<\/p>\r\n<ul>\r\n\t<li>How much cash does the business need to pay its bills and employees?<\/li>\r\n\t<li>Is\u00a0the business profitable, earning more income than it pays in expenses, or is it losing money and possibly in danger of closing?<\/li>\r\n\t<li>How much of a particular product or mixture of products should the business produce and sell?<\/li>\r\n\t<li>What is the cost of\u00a0making the goods or providing the service?<\/li>\r\n\t<li>What are the business\u2019s daily, monthly, and annual expenses?<\/li>\r\n\t<li>Do customers owe money to the business, and are they paying on time?<\/li>\r\n\t<li>How much money does the business owe to vendors (suppliers), banks, or other investors?<\/li>\r\n<\/ul>\r\n<\/div>\r\n<\/section>\r\n<h2>What Is Accounting?<\/h2>\r\n<p id=\"fs-idm265844704\"><strong><span id=\"term-00012\" data-type=\"term\">Accounting<\/span><\/strong> is the process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities. It results in reports that tell the financial story of the organization. All types of organizations\u2014businesses, hospitals, schools, government agencies, and civic groups\u2014use accounting procedures. Accounting provides a framework for looking at past performance, current financial health, and possible future performance. It also provides a framework for comparing the financial positions and financial performances of different firms. Understanding how to prepare and interpret financial reports will enable you to evaluate two companies and choose the one that is more likely to be a good investment.<\/p>\r\n\r\n[caption id=\"attachment_7698\" align=\"aligncenter\" width=\"534\"]<img class=\" wp-image-7698\" src=\"https:\/\/content-cdn.one.lumenlearning.com\/wp-content\/uploads\/sites\/15\/2023\/02\/19211225\/L16.1.1.png\" alt=\"The illustration shows the first step as, classify, summarize and analyze data. This flows into the second step, prepare financial reports. This flows into the third step, use financial reports to evaluate the firm and make decisions.\" width=\"534\" height=\"216\" \/> Figure 1. The Accounting System[\/caption]\r\n\r\n<p id=\"fs-idm264351920\">The accounting system shown below\u00a0converts the details of financial transactions (sales, payments, purchases, and so on) into a form that people can use to evaluate the firm and make decisions. Data become information, which in turn becomes reports. These reports describe a firm\u2019s financial position at one point in time and its financial performance during a specified period. Financial reports include\u00a0financial statements<em data-effect=\"italics\">,<\/em>\u00a0such as balance sheets and income statements, and special reports, such as sales and expense breakdowns by product line.<\/p>\r\n<div id=\"fs-idm271633872\" class=\"os-figure\">\r\n<h2 class=\"os-caption-container\">Bookkeeping vs. Accounting<\/h2>\r\n<p class=\"os-caption-container\">Accounting is often confused with bookkeeping. <strong>Bookkeeping<\/strong> is the manual or electronic process of recording the financial transactions of a business. <strong>Accounting<\/strong> includes bookkeeping, but it\u00a0goes further to\u00a0analyze and interpret financial information, prepare financial statements, conduct audits, design accounting systems, prepare special business and financial studies, prepare forecasts and budgets, and provide tax services.<\/p>\r\n<section class=\"textbox tryIt\">[ohm2_question height=\"350\"]8598[\/ohm2_question]<\/section>\r\n<\/div>","rendered":"<section class=\"textbox learningGoals\">\n<ul>\n<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand what accounting is&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:14720,&quot;10&quot;:0,&quot;11&quot;:4,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand what accounting is<\/span><\/li>\n<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand who uses financial accounting&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:15233,&quot;3&quot;:{&quot;1&quot;:0},&quot;10&quot;:0,&quot;11&quot;:4,&quot;12&quot;:0,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand who uses financial accounting<\/span><\/li>\n<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand who uses managerial accounting&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:15233,&quot;3&quot;:{&quot;1&quot;:0},&quot;10&quot;:0,&quot;11&quot;:4,&quot;12&quot;:0,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand who uses managerial accounting<\/span><\/li>\n<\/ul>\n<\/section>\n<h2>Why Do We Need Financial Information?<\/h2>\n<section>\n<div>\n<p>In the same way that you track your monthly spending, businesses have large groups of stakeholders who have a vested interest in the continued success of the enterprise. If a business, whether for-profit or nonprofit, becomes financially insolvent and can&#8217;t pay its bills, it will be forced to close. Financial information enables a business to track its accounts and make informed financial decisions.<\/p>\n<p>Each business needs financial information to be able to answer questions such as the following:<\/p>\n<ul>\n<li>How much cash does the business need to pay its bills and employees?<\/li>\n<li>Is\u00a0the business profitable, earning more income than it pays in expenses, or is it losing money and possibly in danger of closing?<\/li>\n<li>How much of a particular product or mixture of products should the business produce and sell?<\/li>\n<li>What is the cost of\u00a0making the goods or providing the service?<\/li>\n<li>What are the business\u2019s daily, monthly, and annual expenses?<\/li>\n<li>Do customers owe money to the business, and are they paying on time?<\/li>\n<li>How much money does the business owe to vendors (suppliers), banks, or other investors?<\/li>\n<\/ul>\n<\/div>\n<\/section>\n<h2>What Is Accounting?<\/h2>\n<p id=\"fs-idm265844704\"><strong><span id=\"term-00012\" data-type=\"term\">Accounting<\/span><\/strong> is the process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities. It results in reports that tell the financial story of the organization. All types of organizations\u2014businesses, hospitals, schools, government agencies, and civic groups\u2014use accounting procedures. Accounting provides a framework for looking at past performance, current financial health, and possible future performance. It also provides a framework for comparing the financial positions and financial performances of different firms. Understanding how to prepare and interpret financial reports will enable you to evaluate two companies and choose the one that is more likely to be a good investment.<\/p>\n<figure id=\"attachment_7698\" aria-describedby=\"caption-attachment-7698\" style=\"width: 534px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-7698\" src=\"https:\/\/content-cdn.one.lumenlearning.com\/wp-content\/uploads\/sites\/15\/2023\/02\/19211225\/L16.1.1.png\" alt=\"The illustration shows the first step as, classify, summarize and analyze data. This flows into the second step, prepare financial reports. This flows into the third step, use financial reports to evaluate the firm and make decisions.\" width=\"534\" height=\"216\" srcset=\"https:\/\/content-cdn.one.lumenlearning.com\/wp-content\/uploads\/sites\/15\/2023\/02\/19211225\/L16.1.1.png 900w, https:\/\/content-cdn.one.lumenlearning.com\/wp-content\/uploads\/sites\/15\/2023\/02\/19211225\/L16.1.1-300x121.png 300w, https:\/\/content-cdn.one.lumenlearning.com\/wp-content\/uploads\/sites\/15\/2023\/02\/19211225\/L16.1.1-768x311.png 768w, https:\/\/content-cdn.one.lumenlearning.com\/wp-content\/uploads\/sites\/15\/2023\/02\/19211225\/L16.1.1-65x26.png 65w, https:\/\/content-cdn.one.lumenlearning.com\/wp-content\/uploads\/sites\/15\/2023\/02\/19211225\/L16.1.1-225x91.png 225w, https:\/\/content-cdn.one.lumenlearning.com\/wp-content\/uploads\/sites\/15\/2023\/02\/19211225\/L16.1.1-350x142.png 350w\" sizes=\"(max-width: 534px) 100vw, 534px\" \/><figcaption id=\"caption-attachment-7698\" class=\"wp-caption-text\">Figure 1. The Accounting System<\/figcaption><\/figure>\n<p id=\"fs-idm264351920\">The accounting system shown below\u00a0converts the details of financial transactions (sales, payments, purchases, and so on) into a form that people can use to evaluate the firm and make decisions. Data become information, which in turn becomes reports. These reports describe a firm\u2019s financial position at one point in time and its financial performance during a specified period. Financial reports include\u00a0financial statements<em data-effect=\"italics\">,<\/em>\u00a0such as balance sheets and income statements, and special reports, such as sales and expense breakdowns by product line.<\/p>\n<div id=\"fs-idm271633872\" class=\"os-figure\">\n<h2 class=\"os-caption-container\">Bookkeeping vs. Accounting<\/h2>\n<p class=\"os-caption-container\">Accounting is often confused with bookkeeping. <strong>Bookkeeping<\/strong> is the manual or electronic process of recording the financial transactions of a business. <strong>Accounting<\/strong> includes bookkeeping, but it\u00a0goes further to\u00a0analyze and interpret financial information, prepare financial statements, conduct audits, design accounting systems, prepare special business and financial studies, prepare forecasts and budgets, and provide tax services.<\/p>\n<section class=\"textbox tryIt\"><iframe loading=\"lazy\" id=\"ohm8598\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=8598&theme=lumen&iframe_resize_id=ohm8598&source=tnh&show_question_numbers\" width=\"100%\" height=\"350\"><\/iframe><\/section>\n<\/div>\n","protected":false},"author":21,"menu_order":4,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"What Is Accounting from Financial Accounting\",\"author\":\"Debbie Porter and Lumen Learning\",\"organization\":\"\",\"url\":\"https:\/\/courses.lumenlearning.com\/finaccounting\/chapter\/chapter-1\/\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"original\",\"description\":\"14.1 Accounting: More than Numbers\",\"author\":\" Lawrence J. 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