Introduction to Accounting Accounting and double-entry bookkeeping; financial and managerial accounting; basic financial statements (income statement, statement of cash flows, statement of changes in owners' equity and balance sheet); permanent (real) and temporary (nominal) accounts; four types of accounting transactions. 1. Definition of accounting What is accounting? People in thebusiness world consider it to be quite important. When you plan toinvest in McDonald's stock, buy new equipment, or forecast future sales and expenditures, you almost certainly use accounting information. Why? Because, accounting provides information for decision-making in the business world. Accountingis a service-based profession that provides reliable and relevant financial information useful in making decisions. Financial information may include sales, expenses, taxes and other figures. There are three steps to preparing financial information:identification,recordingandcommunication. First, economic events areidentified. A sale at a gas station, payment of taxes by a commercialenterprise, or purchase of insurance are all examples of economic events. Next, all economic events arerecorded. Recording provides a history of a company's financial activities. In this step, economic events are also classified and summarized. Finally, information about classified and summarized economic events iscommunicatedto interested parties. Such communication may take several forms. One such formis a financial statement which youwill read about later in this tutorial. 2. Users of accounting information There are two broad categories ofinterested parties, oraccounting information users: external users internal users External usersare parties outside the reporting entity or company who are interested in the accounting information. Types of external users include: Investors(i.e., owners), who use accounting information to make buy, sell or keep decisions related to shares, bonds, etc. Creditors(i.e., suppliers, banks), who utilize accounting information to make lending decisions. Taxing authorities(i.e., Internal Revenue Service), who need accounting information to determine a company's tax liabilities. Customers, who may need accounting information to decide which products to buy from which companies. Internal usersare parties inside the reporting entity or company who are interested in accountinginformation. Types of internal users include: A company's senior and middlemanagement, who use accounting information to run thebusiness. Employeeswho use accounting information to determine a company's profitability and profit sharing. Financial accountingprovides information that is designed to satisfy the needs of external users. Such reporting is usually done in the form of financial statements. Managerial accountingprovides information that is useful in running a company by internal users. Such reporting is usually accomplished through custom-designed (or managerial) reports. The illustration below shows relationships between the types of accounting and accounting information users. Illustration 1: Types of accounting and accounting information users.