Quick Vocab to Review

Assets = Liabilities + Equity

• This fundamental equation represents the connection between a company's possessions, debts, and the owners' ownership in the business.
• Luca Pacioli, known as the 'father of accounting,' is often attributed with introducing this formula in the 1600s, after witnessing Italian merchants utilizing it.
• In his book "Summa de Arithmetica, Geometria, Proportioni et Proportionalita," Pacioli described the double-entry bookkeeping system, which revolutionized accounting by providing a systematic way to record financial transactions.

• This refers to a systematic method of recording financial transactions that recognizes the dual impact of every transaction on a company's financial position.
• It is based on the principle that every business transaction involves at least two accounts and has equal and opposite effects on those accounts. In double-entry bookkeeping, each transaction is recorded using debits and credits, with debits representing increases in assets and expenses and credits representing increases in liabilities, equity, and revenues.
• (We will explore debits and credits much deeper in Chapter 2!)
• The goal of double-entry bookkeeping is to maintain the balance of the accounting equation (Assets = Liabilities + Equity) and provide accurate and complete financial information for decision-making, financial reporting, and analysis.

• It was developed by Luca Pacioli in the 15th century and has since become the foundation of modern accounting practices.

• The FASB is an independent organization that establishes and improves financial accounting and reporting standards in the United States. These standards, known as Generally Accepted Accounting Principles (GAAP), guide the preparation of financial statements for public and private companies.

• GAAP refers to the common set of accounting principles, standards, and procedures used in the United States. These principles are established by the Financial Accounting Standards Board (FASB) and provide a framework for the preparation and presentation of financial statements. GAAP ensures consistency, comparability, and reliability in financial reporting for both public and private companies in the U.S.

• The IASB is a global standard-setting body that develops and promotes International Financial Reporting Standards (IFRS). IFRS provides a common framework for financial reporting in many countries around the world, enabling comparability and transparency across international boundaries.

• IFRS represents a set of accounting standards developed and maintained by the International Accounting Standards Board (IASB). IFRS is widely used across the globe, particularly in over 140 countries, for the preparation of financial statements. The goal of IFRS is to create a single, globally accepted financial reporting framework that enhances transparency, comparability, and understandability of financial statements internationally.

• The GASB establishes accounting and financial reporting standards for state and local governments in the United States. Its standards, known as Generally Accepted Accounting Principles for state and local governments (GAAP-G), govern the financial reporting of these entities.

• The FAF is an independent organization responsible for overseeing and providing administrative support to the FASB and the Governmental Accounting Standards Board (GASB). The FAF ensures the independence and integrity of these standard-setting boards.

• Enacted in response to the 2008 financial crisis, the Dodd-Frank Act aims to promote financial stability and protect consumers. It includes provisions for enhanced regulation of financial institutions, increased accountability and transparency in the financial system, and the creation of new agencies, such as the Consumer Financial Protection Bureau (CFPB).

• SOX was passed in response to accounting scandals at companies like Enron and WorldCom. It aims to protect investors and improve the reliability and accuracy of corporate financial disclosures. SOX introduced requirements for enhanced internal controls, independent audit committees, and increased corporate governance standards.

• The PCAOB is a nonprofit organization established by the Sarbanes-Oxley Act. It oversees audits of public companies to protect the interests of investors and ensure the quality and integrity of financial reporting. The PCAOB sets auditing standards and conducts inspections and investigations of audit firms.

• Arthur Andersen was one of the largest accounting firms globally until its collapse in 2002 due to its involvement in the Enron scandal. The Enron case involved unethical accounting practices and audit failures. The collapse of Arthur Andersen highlighted the need for increased regulation and oversight of auditing firms, leading to the establishment of the PCAOB and stricter regulations on audit companies.

• The Securities Act of 1934 is a vital U.S. legislation enacted in response to the Great Depression. It regulates the securities industry and secondary market transactions. The act establishes reporting requirements for public companies, including periodic financial disclosures and insider trading regulations. It led to the creation of the U.S. Securities and Exchange Commission (SEC) to enforce these regulations and protect investors.

• The SEC is a federal agency in the United States responsible for enforcing securities laws and regulating the securities industry. It ensures fair and efficient markets, facilitates capital formation, and protects investors. The SEC oversees financial reporting by public companies, sets disclosure requirements, and enforces compliance with securities laws.

• The CFTC is an independent federal agency responsible for regulating commodity futures and options markets in the United States. It oversees the trading of futures contracts and works to ensure fair and transparent markets. The CFTC plays a crucial role in overseeing derivatives and protecting market participants from fraud and manipulation.

• The CFPB is a regulatory agency established by the Dodd-Frank Act of 2010. Its primary mission is to protect consumers in the financial marketplace. The CFPB regulates and enforces consumer financial laws, promotes fair and transparent practices by financial institutions, and provides consumers with resources and information to make informed financial decisions.

• The American Institute of Certified Public Accountants is the largest professional organization for certified public accountants (CPAs) in the United States. It sets ethical standards, develops professional guidelines and best practices, and provides resources and support to its members. The AICPA also offers various professional certifications and credentials, including the Certified Public Accountant (CPA) designation.

• Each state in the United States has its own State Board of Accountancy, responsible for regulating the accounting profession within its jurisdiction. These boards ensure that individuals meet the necessary educational and experience requirements to become licensed CPAs in their respective states. State boards administer the Uniform CPA Examination, which is a standardized exam required to become a licensed CPA.

• The Uniform CPA Examination is a rigorous exam administered by the state boards of accountancy. It assesses the knowledge and skills necessary to practice as a certified public accountant. Candidates who pass the exam, meet the educational and experience requirements, and fulfill any additional state-specific requirements can obtain a CPA license from their state board. The CPA license is a professional designation that demonstrates expertise in accounting and opens up career opportunities in public accounting, corporate finance, government agencies, and other sectors.

• Auditing and Attestation (AUD): This section tests candidates' knowledge and skills in auditing engagements, including planning, internal controls, audit procedures, and reporting. It evaluates their ability to assess risks, apply auditing standards, and evaluate and report on audit findings.
• Business Environment and Concepts (BEC): The BEC section focuses on business concepts and their impact on accounting and financial reporting. It covers topics such as corporate governance, economic concepts, financial management, information technology, and business ethics. Candidates are tested on their understanding of business environments and their ability to apply business concepts to real-world scenarios.
• Financial Accounting and Reporting (FAR): The FAR section assesses candidates' knowledge and application of generally accepted accounting principles (GAAP) for financial reporting. It covers topics such as financial statement preparation, accounting and reporting for various entities, governmental accounting, and non-profit accounting. Candidates are tested on their understanding of financial accounting concepts and their ability to analyze and interpret financial information.
• Regulation (REG): The REG section focuses on federal taxation, business law, ethics, and professional responsibilities. It covers topics such as individual and entity taxation, federal taxation of property transactions, business law, and ethics. Candidates are tested on their knowledge of tax laws, legal and ethical considerations, and their ability to apply regulations to different scenarios.

• A business owned by one person. The owner is personally liable for all business debts. For example, a local bakery owned and operated by a single individual.

• A business owned by two or more people. Each partner shares the profits, losses, and management of the business. For example, a law firm owned by multiple lawyers.

• A business owned by shareholders and considered a separate legal entity. A business owned by shareholders and considered a separate legal entity. Shareholders are not personally liable for corporate debts. Example: Large companies like Apple or Google.

• "Double taxation" is a term that describes how a corporation's profits are taxed twice.
• First, the corporation itself pays taxes on its earnings, which is the first "taxation." Then, if the corporation distributes any remaining profits to its shareholders as dividends, these distributions are taxed again on the shareholders' personal tax returns, resulting in the "double" taxation.
• This situation is unique to corporations, as owners in other business structures such as sole proprietorships or partnerships are only taxed once on business income.

• An S Corporation is a business entity that combines the limited liability protection of a corporation with the tax advantages of a partnership or sole proprietorship. By meeting specific eligibility criteria and filing Form 2553 with the IRS, the S Corporation can avoid double taxation. Instead, its income, deductions, and credits flow through to the shareholders, who report them on their individual tax returns. S Corporations are a popular choice for small and medium-sized businesses seeking liability protection and favorable tax treatment.
• Fun fact: Earned Wisdom, LLC, the entity that owns and operates Survive Studios, has elected to be taxed as an S Corporation to benefit from potential tax savings.

• A business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An example would be a small business with a single owner who wants to protect personal assets (e.g. their home) from business liabilities.

• The income statement, also known as the statement of profit and loss or statement of operations, summarizes the revenues, expenses, gains, and losses of a business over a specific period. It shows the net income or net loss generated by the business during that period, providing insights into its profitability.

• The statement of retained earnings shows changes in the retained earnings balance over a specific period. It starts with the beginning retained earnings balance, adds net income, subtracts dividends or distributions, and adjusts for any other relevant factors. The statement reveals how profits are retained within the business or distributed to owners/shareholders.

• The balance sheet, also known as the statement of financial position, presents the financial position of a business at a specific point in time. It shows the company's assets, liabilities, and shareholders' equity. Assets represent what the company owns, liabilities represent what it owes, and shareholders' equity represents the owners' residual interest in the business.

• The statement of cash flows provides information about the cash inflows and outflows of a business during a specific period. It categorizes cash flows into operating activities, investing activities, and financing activities. This statement helps assess the company's ability to generate cash, its investing and financing activities, and its overall liquidity.

• A Certified Public Accountant is a licensed accounting professional who has met the education, experience, and examination requirements set by the state boards of accountancy. CPAs possess in-depth knowledge of accounting principles, tax regulations, auditing procedures, and other financial areas. They provide a wide range of accounting services, including financial reporting, tax planning and preparation, audit and assurance, and advisory services to businesses, organizations, and individuals.

• The Chief Financial Officer is a senior executive responsible for overseeing an organization's financial activities, strategies, and operations. The CFO plays a key role in financial planning, analysis, and decision-making, ensuring the organization's financial health and sustainability. They provide financial guidance, monitor financial performance, manage budgets, and collaborate with other executives in strategic planning and risk management.

• The Controller or Treasurer is a financial executive responsible for managing an organization's financial operations, accounting systems, and financial reporting. They oversee functions such as financial analysis, budgeting, cash management, internal controls, and financial compliance. The Controller/Treasurer plays a crucial role in maintaining accurate financial records, providing financial insights, and ensuring compliance with accounting standards and regulatory requirements.

• A financial statement audit is an examination and verification of an organization's financial statements by an independent auditor. The audit aims to provide assurance on the accuracy, reliability, and fairness of the financial information presented in the statements. The auditor assesses internal controls, tests transactions and account balances, and expresses an opinion on whether the financial statements conform to applicable accounting standards and present a true and fair view of the organization's financial position and performance.

• Public accounting refers to accounting services provided by accounting firms to clients, including businesses, governments, and non-profit organizations. Public accountants offer services such as auditing, tax advisory, and consulting. Private accounting, on the other hand, refers to accounting roles within organizations, where accountants work in-house to handle financial reporting, budgeting, cost management, and internal accounting functions. In accountant circles, these are often to referred to as “industry accounting jobs.”

• The Big Four refers to the four largest international accounting firms: Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY), and KPMG. These firms are globally recognized for their expertise in audit, assurance, tax, and advisory services. They serve a wide range of clients, including multinational corporations, governments, and non-profit organizations, and are known for their extensive industry knowledge and professional standards.

• Auditing services involve the independent examination of financial records, systems, and processes to assess their accuracy, compliance with accounting standards, and effectiveness in providing reliable financial information. Auditors conduct procedures such as testing transactions, verifying account balances, and evaluating internal controls. The objective is to provide assurance on the fairness and reliability of financial information to stakeholders.

• An audit workpaper is a document or electronic record that serves as a written record of the audit procedures performed, the evidence gathered, and the conclusions reached during an audit engagement. It provides a detailed account of the audit work conducted, including the nature, timing, and extent of procedures performed, as well as the results and findings. Audit workpapers serve as a crucial source of evidence and support for the audit opinion issued by the auditor. They document the audit trail, facilitate review and quality control, and ensure the audit engagement is adequately documented for compliance with auditing standards and regulatory requirements.

• Tax services encompass a range of activities related to tax planning, compliance, and advisory for individuals and organizations. Tax professionals help clients navigate complex tax laws, identify tax-saving opportunities, prepare tax returns, and ensure compliance with tax regulations. They provide guidance on optimizing tax strategies, minimizing tax liabilities, and addressing tax-related issues.

• A tax return is a document filed with the tax authorities that reports an individual's or entity's income, expenses, deductions, and tax liabilities for a specific tax period. It serves as a formal declaration of taxable income and enables the calculation of the tax liability owed to the government.

• Tax returns vary depending on the jurisdiction and the type of taxpayer, such as individuals, businesses, or organizations. The tax return provides a comprehensive overview of the taxpayer's financial activities and serves as the basis for determining the amount of tax owed or the potential tax refund. It is essential to accurately complete and file tax returns within the designated deadlines to ensure compliance with tax laws and regulations.

• Advisory services involve providing expert advice and guidance to clients on various financial, strategic, and operational matters. These services may include financial consulting, risk management, mergers and acquisitions, business valuation, forensic accounting, technology consulting, and other specialized areas. Advisors work closely with clients to analyze challenges, develop solutions, and provide insights to support informed decision-making.

• Due diligence refers to the comprehensive assessment and investigation of financial and accounting information related to a business or investment opportunity. It involves a systematic review of financial statements, records, and other relevant financial data to evaluate the accuracy, completeness, and reliability of financial information.

• From an accounting perspective, due diligence involves conducting in-depth analysis and verification of financial records, accounting policies, and internal controls. The purpose is to assess the financial health, performance, and potential risks associated with a business or investment. This process includes reviewing financial statements, such as balance sheets, income statements, and cash flow statements, to gain insights into the company's financial position, profitability, and cash flow dynamics. Additionally, it involves examining supporting documentation, contracts, agreements, and disclosures to ensure compliance with accounting standards and legal requirements.

• Accounting due diligence aims to identify potential financial risks, such as inaccuracies or omissions in financial reporting, undisclosed liabilities, contingent liabilities, irregularities in revenue recognition or expense classification, and deficiencies in internal controls. It helps potential buyers, investors, or lenders make informed decisions by providing them with a comprehensive understanding of the financial aspects of the target business or investment opportunity.

• The process of accounting due diligence is typically conducted during mergers and acquisitions, business valuations, investment evaluations, or financial audits. It involves working closely with accounting professionals and experts to thoroughly review financial information, assess the reliability of financial reporting, and identify any areas of concern that may impact the financial performance or value of the target entity.

• Accounting due diligence plays a critical role in minimizing risks, ensuring transparency, and enhancing confidence in financial information. It allows stakeholders to make informed decisions based on accurate and reliable financial data, ultimately contributing to the overall success and effectiveness of business transactions and investment activities.

• Mergers and acquisitions (M&A) refer to the consolidation of companies through various financial transactions, such as mergers, acquisitions, consolidations, or asset purchases. From an accounting perspective, M&A activities involve assessing the financial aspects of combining or acquiring businesses to determine the financial impact and accounting treatment of the transaction.

• Accounting plays a crucial role in M&A by providing guidance on the valuation, recording, and reporting of assets, liabilities, equity, and financial results. Key considerations in M&A from an accounting perspective include:

• Governmental accounting refers to the accounting and financial reporting practices used by governmental entities such as federal, state, and local governments. It follows specific accounting principles and standards designed to meet the unique needs of the public sector. Governmental accounting emphasizes accountability, transparency, and compliance with legal and regulatory requirements.

• Not-for-profit accounting focuses on the financial reporting and accounting practices of nonprofit organizations. Nonprofit accounting incorporates specific guidelines to address the unique characteristics of these organizations.

• Cost Accountants are professionals who specialize in analyzing and controlling costs within an organization. They play a crucial role in budgeting, cost analysis, and decision-making by providing valuable insights into cost structures, cost allocation methods, and cost control measures. Cost accountants help businesses optimize their operations, improve profitability, and make informed financial decisions by analyzing and monitoring costs associated with production, inventory, overhead, and other cost elements. They work closely with management teams to develop cost-effective strategies, implement cost control systems, and provide accurate cost information for financial reporting and decision-making purposes.

• Tax Attorneys are legal professionals who specialize in tax law and provide legal guidance and representation related to tax matters. They possess in-depth knowledge of tax codes, regulations, and legal frameworks, and assist individuals and businesses in navigating complex tax issues. Tax attorneys advise clients on tax planning strategies, help with tax compliance and reporting, represent clients in tax disputes and audits, and provide guidance on minimizing tax liabilities while ensuring compliance with applicable tax laws. They play a vital role in helping clients understand tax implications, identify tax-saving opportunities, and ensure compliance with tax regulations.

• Studying accounting equips graduates with a diverse skill set and opens doors to a multitude of non-accounting related careers. The analytical, problem-solving, and financial skills acquired through an accounting education are highly transferable and valuable across various industries and professions. Some non-accounting career paths that accounting graduates can pursue include:

• Accounting education provides a solid foundation for a wide range of career opportunities beyond traditional accounting roles. The skills, knowledge, and professional ethics gained through accounting studies can pave the way for a successful and rewarding career in diverse fields where financial expertise and analytical thinking are highly valued.

• Accountants now have access to powerful data analytics tools that allow them to extract meaningful insights from vast amounts of financial data. By using techniques like data mining, machine learning, and statistical analysis, accountants can identify trends, detect patterns, and uncover valuable information to support decision-making. Visualization tools like Tableau, Power BI, or QlikView are employed to present data in a visually appealing and easily understandable format, facilitating the communication of complex financial information.

• Artificial Intelligence (AI) is increasingly used in accounting for tasks such as data analysis, pattern recognition, and prediction. AI algorithms can automate repetitive tasks, enhance accuracy, and speed up processes, freeing up accountants to focus on more strategic and analytical aspects of their work. AI-powered systems can also assist in fraud detection, risk assessment, and financial forecasting, improving the quality and reliability of financial information.

• Microsoft Excel remains a fundamental tool in accounting. It is used for various tasks such as financial modeling, budgeting, data analysis, and reporting. Excel's functionality, including formulas, functions, and pivot tables, enables accountants to organize and manipulate data effectively. Proficiency in Excel is considered essential for accountants to perform their day-to-day tasks efficiently.

• Accounting software has transformed the way businesses manage their financial operations. QuickBooks, for example, is widely used by small businesses for bookkeeping, invoicing, and financial reporting. It simplifies tasks like bank reconciliation, accounts payable, and accounts receivable, providing a user-friendly interface for non-accounting professionals. Enterprise-level accounting software like SAP, Oracle, or NetSuite caters to the needs of larger organizations, offering features like financial management, supply chain management, and customer relationship management.

• Tax professionals rely on specialized software to navigate the complexities of tax regulations. Programs like Intuit's TurboTax, Thomson Reuters' UltraTax, or H&R Block's tax software provide comprehensive solutions for tax preparation, calculation, and electronic filing. These tools incorporate up-to-date tax laws, streamline the process of entering data, and perform calculations to ensure accurate and compliant tax returns.

• Auditors utilize specialized audit software to enhance the efficiency and effectiveness of their engagements. These software solutions provide features such as data extraction, analysis, and visualization, allowing auditors to assess risks, test controls, and detect anomalies more efficiently. Audit software also facilitates collaboration among audit team members and streamlines the documentation and reporting process.

• The future of accounting is intertwined with technological advancements. Emerging technologies like blockchain, robotic process automation (RPA), and cloud computing are poised to transform the profession further. Blockchain has the potential to revolutionize financial transactions and enhance the security and transparency of financial data. RPA automates repetitive tasks, reducing errors and increasing efficiency. Cloud computing enables real-time collaboration, data storage, and accessibility from anywhere. Accountants need to stay updated with these technological developments to remain competitive and adapt to the evolving landscape of the profession.
• Overall, technology continues to reshape the accounting industry, providing accountants with advanced tools and capabilities to improve accuracy, streamline processes, and deliver valuable insights. Embracing and leveraging technology is essential for accountants to thrive in a rapidly changing digital world.