What is Accounting?

Uploaded by AccountingWITT on 20.11.2010

(Copyright 2010. AccountingWITT)
What is Accounting? Accounting is the language of business.
Well, what is business? Well, you could say business is like somebody
taking a hammer, building a house, and then, taking his stuff that he made, and selling
to somebody with money. Then they make their exchange and it is all
Another way to look at business is that it is a magical box, you take raw materials,
put it in the box, and then it comes out as goods; that you can then sell, and make money.
That box is business.
So let's say that you have a business.
You make something that takes you $100 dollars to make and you sell it for $200.
You have a profit of $100 and you are happy.
I just told you a story about a business that made $100.
So, who should we tell our story to?
You might want to tell your story to banks or investors.
Banks or investors might want to hear your story, because they might want to lend you
money, or invest money in your business.
Another person who wants to hear your story is Uncle Sam. He wants to tax you.
We could break it down to three different people that want to hear your story:
People on the inside, or "INTERNAL USERS," People on the outside, "EXTERNAL USERS,"
Or the government.
The language by which you tell them people stories is sometimes called:
MANAGERIAL Accounting for INTERNAL USERS, Financial Accounting for EXTERNAL USERS,
and then Tax Accounting for government USERS.
If you've taken an accounting class, it might be called MANAGERIAL, Financial, or Tax.
The actual language that EXTERNAL USERS want to hear your information in is "GAAP."
G-A-A-P, which stands for Generally Accepted Accounting Principles.
The government wants to hear your story based on the INTERNAL Revenue Code.
That is the standard by which you must tell your story.
Now, INTERNAL USERS, what's the name of the language that they want to hear?
It's actually whatever you want. There is no standard MANAGERIAL Accounting
If you're a business, and you are talking to an EXTERNAL user, you want to look good,
or show that you made a high profit. Everyone wants to brag about how good their
business is doing. However, when you talk to the government,
your objective is to make it look like you made nothing.
Because, if you're rich, they will take all of your money.
Now, if you're talking to an INTERNAL user, your objective isn't really to look good,
or to look like you made nothing, it's really just to tell it as accurately as you can;
because that is the information upon which managers and decision makers will make decisions.
Now, your story might be the exact same story in every instance, but depending on who your
audience is, you're going to use a different language, and each of these languages will
actually tell a different story, even though it is based on the same actions of the business.
In review, accounting is the language of business. Business is when you do stuff for profit.
When you tell the story of your business, you're going to be telling it to one of a
few different options. INTERNAL USERS want to hear your story based
on the language of MANAGERIAL accounting. EXTERNAL USERS want to hear it based on GAAP.
And the government wants to hear it based on the Tax Code.