homeowners’ associations, churches, credit unions, and colleges)
Income tax accounting while you’re living and estate tax accounting after you die
Accounting for farmers who grow their products, accounting for miners who extract their products from the earth, accounting for producers who manufacture products, and accounting for retailers who sell products that others make
Accounting for businesses and professional firms that sell services rather than products, such as the entertainment, transportation, and healthcare industries
Accounting where periodic financial statements are legally mandated (public companies are the primary example) and accounting where such formal accounting reports are not legally required
Accounting that mainly adheres to historical cost (businesses) and accounting that records changes in market value (mutual funds, for example)
Accounting in the private sector of the economy and accounting in the public (government) sector
Accounting for going-concern businesses that will be around for some time and accounting for businesses in bankruptcy that may not be around tomorrow
Accounting is necessary in a free-market capitalist economic system. It’s equally necessary in a centralized, government-controlled socialist economic system. All economic activity requires information. The more developed the economic system, the more the system depends on information. Much of the information comes from the accounting systems used by the businesses, institutions, individuals, and other players in the economic system.
Accounting’s Two Primary Roles
First, the accounting function and systems established must be able to produce complete, accurate, reliable, and timely (“CART”) financial information on which businesses can base sound decisions.In today’s intensely competitive global economy that is now supported by a broad ranging technology infrastructure that delivers information in split seconds, it has never been more important for accounting systems and the entire accounting function to produce and deliver vital financial information on a timely basis for review and management action.
Second, a business’s accounting function must be developed, implemented, managed, and periodically revised and updated to always be in the mindset of safeguarding company assets. Here, we are not just talking about preventing theft of liquid or hard assets such as an employee who may be embezzling cash or stealing inventory. Rather, the accounting function is now one of the critical gatekeepers associated with helping protect company intellectual property, shelter invaluable customer data and databases, preserve the integrity of critical financial information, control and direct the distribution of confidential financial operating results to the appropriate parties, and assist with critical risk management and insurance protection strategies, just to name a few.
As you progress through the rest of this book, it becomes abundantly clear that the accounting function has evolved into something much more than a bunch of bean counters, working with debits and credits, producing financial statements, and trying desperately to meet the annual income tax reporting deadlines. If the last 24 months has taught us anything, it is that the speed at which economic business models are now formulated, launched, disrupted, expanded, contracted, and potentially eliminated from the global market is in warp drive. Massive volumes of raw confidential business data are now considered one of the most valuable assets a company owns and monetizes to generate profits (aided by huge technological advancements). As such, accounting’s role in producing CART financial information in coordination with helping protect this data has never been more critical. Throughout this book, we provide examples and make references to accounting in the new, digital age; we start by diving into the digitization of accounting in Chapter 4 and a new era of risks.
Taking a Peek behind the Scenes
Every business and not-for-profit entity needs a reliable bookkeeping system (see Chapter 3). Accounting is a much broader term than bookkeeping. For one thing, accounting encompasses the problems in measuring the financial effects of economic activity. Furthermore, accounting includes the function of financial reporting to those who need the information. Business managers and investors and many other people depend on financial reports for information about the performance and condition of the entity.
Bookkeeping — also called recordkeeping — refers to the process of capturing, accumulating, organizing, storing, protecting, and accessing the financial information base of the entity. Of course, the financial information base should be complete, accurate, reliable, and timely. Every recordkeeping system needs quality controls built into it, which are called internal controls or internal accounting controls. When an error creeps into the system, it can be difficult to root out and correct. Data-entry controls are particularly important. The security of online and computer-based accounting systems has become a top priority of both for-profit businesses and not-for-profit entities. So-called cyber threats are a serious problem and can bring a big business to its knees, which we discuss further in Chapter 4.
Most people don’t realize the importance of the accounting department in keeping a business operating without hitches and delays. That’s probably because accountants oversee many of the back-office functions in a business — as opposed to sales, for example, which is frontline activity, out in the open and in the line of fire. Go into any retail store, and you’re in the thick of sales activities. But have you ever seen a company’s accounting department in action?
Folks may not think much about these back-office activities, but they would sure notice if those activities didn’t get done. On payday, a business had better not tell its employees, “Sorry, but the accounting department is running a little late this month; you’ll get your checks later.” And when a customer insists on up-to-date information about how much they owe the business, the accounting department can’t very well say, “Oh, don’t worry, just wait a week or so, and we’ll get the information to you then.”
Typically, the accounting department is responsible for the following:
Payroll: The total wages and salaries earned by every employee every pay period, which are called gross wages or gross earnings, have to be calculated. Based on detailed private
