Elements ot Financial Accounting

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How well is a business doing? Can it survive an unforeseen temporary drop in cash flows? How does a business compare with others of its size in the industry? Answering these questions and others like them is part of the accounting function. The accounting function has two parts, financial accounting and management accounting. Financial accounting is concerned with recording and organizing the financial data of a business, which include revenues and expenses, and an enterprise's resources and the claims on those resources. Management accounting is concerned with the costs and benefits of the various activities of an enterprise. The goal of management accounting is to provide managers with information to help in decision making.

Engineers have always played a major role in management accounting, especially in a part of management accounting called cost accounting. They have not, for the most part, had significant responsibility for financial accounting until recently. With the growth in importance of small technology-based enterprises, many engineers have taken on broad managerial responsibilities that include financial accounting. Even engineers who do not have broad managerial responsibilities need to know the elements of financial accounting to understand the enterprises in which they work. Management accounting is not covered in this text because it is difficult to provide useful information without taking more than a single chapter. Instead, we focus on financial accounting.

The object of financial accounting is to provide information to internal management and interested external parties. Internally, management uses financial accounting information for processes such as budgeting, cash management, and management of long-term debt. External users include actual and potential investors and creditors who wish to make rational decisions about an enterprise. External users also include government agencies concerned with taxes and regulation.

Areas of interest to all these groups include an enterprise's revenues and expenses, and assets (resources held by the enterprise) and liabilities (claims on those resources).

In the next few sections, we discuss two basic summary financial statements that give information about these matters: the balance sheet and the income statement. These statements form the basis of a financial report, which is usually produced on a monthly, quarterly, semiannual, or yearly basis. Following the discussion of financial statements, we shall consider the use of information in these statements when making inferences about an enterprise's performance compared with industry standards and with its own performance over time.

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