What does Accounting Tell us?

Accounting gives us a way of talking money: where it goes and how it could be used in the future. This is important for every facet of business. In fact, accounting is crucial for marketing, HR, and finance professionals. It is probably the most important topic you can cover in business school.

Before we move on, there are a few bits of terminology that we need to clarify:

Entity Theory:

Who produces accounting information? Accounting information is recorded and aggregated for entities. You may ask what is an entityEntity:
A company, group of companies, unincorporated business (sole proprietor or partnership), or individual participating in business activities.? Typically, we would think of an entity as a company, but it could also be a person.

For example, you could (and should) keep your own accounts so you can make informed decisions about how to spend your money, maybe by using a budget. In this class, our entity is typically a company because companies tend to engage in more complicated transactions. So, if we can learn to work with company accounting information, you shouldn’t find your personal accounting too complicated.

Transactions:

What is a transaction? A transaction is a business activity or event that an entity engages in. An accounting transaction takes place if an entity gives something up, such as makes a cash payment, and/or gets something, like sneakers for your collection. Examples are buying a car, taking out a student loan, paying back these student loans, or paying salaries or year-end bonuses to employees.

Of course, an entity will engage in activities that do not involve paying cash or getting something. An example of a non-transaction is hiring an employee: it is a business activity with an employment contract! But it doesn’t involve giving up anything, at least not until the employee has worked and earned a paycheque, and the company doesn’t get anything until the employee contributes their efforts by working. So, hiring an employee is not an accounting transaction because nothing is given up, for example, no cash paid yet, and nothing is received, such as employee effort.

Periodicity:

When or how often is accounting information reported? A reporting periodReporting Period:
The span of time covered by a set of financial statements, typically one year. is the span of time covered by a set of financial statementsFinancial Statements:
The primary method used to communicate financial information to internal and external users. Financial statements are the starting point for income tax calculations, and publicly listed companies are required to publish full financial statements at least once per year. The full suite of financial statements: Statement of Financial Position, Income Statement, Statement of Changes in Equity, and Statement of Cash Flows.. Accountants use the word periodicityPeriodicity:
A problem arising from artificially splitting a company’s lifespan into shorter periods. See also: accrual accounting, adjusting journal entries, revenue recognition. to describe how a company’s life is divided into artificial time periods. For example, Sears Canada opened in 1952 and closed its doors in 2018. Sears’ life was 1952-2018, but these 66 years were divided into artificial time periods, specifically, fiscal years of 01 February to 31 January annually.

The most common reporting period is the fiscal yearFiscal Year:
Companies have a year-long reporting cycle that is similar in nature to the January to December calendar year, but companies get to choose what day their year will end on. This reporting period is referred to as a fiscal year.. Companies have a year-long reporting cycle that is similar in nature to the January to December calendar year, but companies get to choose what day their year will end on. It’s not necessarily the 31^st of December. This reporting cycle is referred to as a fiscal year.

The most common fiscal year end date is 31 December (fiscal year 01 January to 31 December), however, 31 March (01 April to 31 March) and 30 September (01 October to 30 September) are also common. The idea of periodicity will be important when we talk about accruals in a later chapter.

In technical terms, accounting gives us information about how transactions have affected an entity during a reporting period. Or more specifically, accounting aggregates similar transactions, such as all money paid for telephone bills, or paid for office supplies, or money received from customers over a given reporting period. For example, we could look up (1) how much money Nike made in sneaker sales during the fiscal year 01 June 2018 to 31 May 2019 (answer: $25,880,000 U.S.); or (2) how much Nike paid for the merchandise (e.g., sneakers and clothing) in their stores at 31 May 2019 (answer: $5,622,000 U.S.).