Chapter 3

The ArtThe Artof Accountancyof Accountancy

C H A P T E R 3

What Is Accounting?

• Recording the acquisition of materials

• Keeping track of inventories

• Measuring output

• Analyzing the cost of goods sold

• Managing the profitability of the company or agency

What Are Transactions?

• The exchange of goods, services, and money

• The records of those exchanges in journals and ledgers

• Recorded in chronological order

• Assigned account numbers

• Added up to create account balances

The History of Accounting

• Ancient accounting originated in Asian and Middle Eastern countries 7,000 years ago.

• Modern accounting originated in Italy during the Renaissance.

• Originated as business accounting to keep track of agricultural production and profitability

• Currently done by computers

Generally Accepted Accounting Principles

• Expenses are reductions in equity.

• Expenditures are extinguished cash resources.

• Revenues are increases in cash resources.

• Businesses and nonprofit organizations take in revenues and make expenses.

• Governments take in revenues and make expenditures.

Full Accrual Accounting

• Used for business and nonprofit accounting

• Takes into consideration depreciation of fixed assets

• Generally accepted accounting principles are prescribed by the FASB

• Records equity on balance sheets

Modified Accrual Accounting

• Used for nonprofit and government accounting

• Does not depreciate assets

• Generally accepted accounting principles are prescribed by the GASB

• Records fund balance on the balance sheet rather than equity

Accounting Terms You Need to Know

• Fund balance and equity

• Depreciation

• Ledger

• Journal

(continued)

Accounting Terms You Need to Know (continued)

• T-accounts

• Debits

• Credits

• Codes of ethics and conduct

Equity Versus Fund Balance

• Both are left over when liabilities are subtracted from assets.

• Equity represents the value of the company.

• Fund balances represent value in a specific fund accumulated on behalf of the taxpayers for a specific purpose.

Journal

• A journal is a book in which transactions are recorded in chronological order.

• A running balance is kept of the total balance of the fund.

Ledger

• A ledger is a book in which transactions are recorded by account in chronological order.

• A running balance of each fund is kept.

T-Accounts

The two columns record debits and credits.

Debits

Addition of an asset or addition of an expense

Credits

Reduction of an asset or reduction of an expense

Paper-Based Accounting

• The paper books actually exist as described.

• All calculations are done manually.

• Reports are constructed from account balances.

Computer-Based Accounting

• Transactions are recorded in a file in chronological order.

• Reports are constructed by the computer when commands are provided.

Depreciation

• Depreciation is a reduction in the value of buildings, vehicles, and equipment due to aging.

• The life of the capital item must be estimated.

• The salvage value must be estimated.

(continued)

Depreciation (continued)

• The salvage value is subtracted from the original purchase price.

• The difference is divided by the number of years.

• The resulting amount is subtracted from the original cost each year.

Codes of Ethics

• Codes vary from profession to profession.

• To truly be a profession, there needs to be a code of ethics.

• Codes generally define honesty as the best policy.

• Recording transactions honestly is important in accounting.

• Ethical dilemmas are about doing the right thing when competing codes are different.

American Institute of Certified Public Accountants’ Code of Ethics

• Defines integrity

• Determines that accountants should ask themselves, “Is this what a person with integrity would do?”

• Applies to the private, nonprofit, and public sectors

Private-Sector AICPA Code Requirements

• Compliance with laws

• Fair dealing in competition

• Protecting the health and safety of the public

• Reporting any illegal activity

• Reporting improper influence over auditors

Nonprofit-Sector Codes of Ethics

• Follow the mission of the agency.

• Avoid conflicts of interest.

• Comply with laws.

• Be fair in dealing with employees.

• Act in the public interest.

Public-Sector Codes of Ethics

• American Society of Public Administration

– Serve the public interest.

– Respect the constitution and laws.

– Demonstrate personal integrity.

– Promote ethical organizations.

– Strive for professional excellence.

(continued)

Public-Sector Codes of Ethics (continued)

• International City/County Management Association

– Be dedicated to and affirm the worth of government.

– Demonstrate integrity.

– Supply elected officials with information on which to make decisions and give them the credit for those decisions.

– Refrain from political activities.

– Seek no favor or personal aggrandizement.

(continued)

Public-Sector Codes of Ethics (continued)

• National Recreation and Park Association

– Adhere to the highest standards of integrity and honesty in all public and personal activities to inspire public confidence and trust.

– Strive for personal development of associates and students.

– Strive for the highest standards of professional competence, fairness, impartiality, efficiency, effectiveness, and fiscal responsibility.

– Avoid any interest or activity that is in conflict with the performance of job responsibilities.

– Support equal employment opportunities.

Conflicts in Codes of Ethicsand Conduct

• The NRPA code does not prohibit participation in the political process and is not specific about financial reporting.

• The ICMA and ASPA codes do prohibit political participation but are not specific about financial reporting.

• The AICPA code is specific about financial reporting and compliance with laws with its own code of conduct.

Summary

• Accounting has a language of its own.

• Leisure services professionals need to learn the language.

• Financial reporting is fraught with ethical dilemmas.

• One ethical dilemma is which codes of ethics leisure service financial managers should focus on.