Chapter 1 : Accounting Introduction

Topics covered in this snack-sized chapter:



Introduction to Accounting arrow_upward


  • Accounting is a language of systematic recording, reporting, and analysis of financial transactions of a business.
  • Accounting identifies, records, and communicates relevant, reliable and comparable information about an organization’s business activities.
  • Accounting is the universal language of business and finance.
  • Accounting helps to communicate financial information about a business to shareholders.

    • Types of Accounting                        arrow_upward



  • Type
  • Details

    • Financial Accounting

  • It includes reporting of the financial position and performance of a firm through financial statements issued to the external users on a periodic basis.
  • It includes:
    • Revenues, Earnings, Assets and liabilities
    • Profit and loss statement and balance sheet

    Management Accounting

  • It combines accounting, finance and management with cutting-edge techniques needed to drive business successfully.
  • It includes:
    • Costing, Budgeting, Net Present Value


    Accounting is about 5 Simple Things arrow_upward


  • Assets – assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset)
  • Liabilities - Obligations that an organization owes to someone else.
  • Expenses - The cost of doing business necessary to produce revenue.
  • Revenue - Income that a company receives from its normal business activities.
  • Owners’ Equity - The amount remaining after the value of all liabilities is subtracted from the value of all assets.

    • Assets arrow_upward


  • Assets: an asset is something that puts money in your pocket.
  • An asset is an economic resource. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset.
  • Liquid Assets: An asset that can be converted into cash quickly and with minimal impact to the price received.
  • Current Assets: A current asset is either cash or an asset that can be sold.
  • Fixed Assets: Assets that are purchased for long-term use and are not likely to be converted quickly into cash.
  • Land: Fixed, but never depreciated.
  • Intangible Assets: Properties other than the physical assets of a business that helps to create operating profit.

    • Liabilities arrow_upward


  • Liability: An obligation to pay debts.
  • Current Liabilities: A debt to be paid with cash or with goods and services within one year or within the entity's operating cycle if the cycle is longer than a year.
  • Long Term Liabilities: Liabilities with a future benefit over one year, such as notes payable that mature longer than one year.
  • Unearned Revenues: Payment received before a good is sold or a service is provided.
  • Bonds: A fixed interest financial asset issued by governments, companies, banks, public utilities and other large entities.

    • Expenses arrow_upward


  • The cost of doing business .
  • Decrease in owners’ equity during the period by using up an asset or a portion of an asset.
  • Can create additional liabilities.

    • Revenue arrow_upward


  • Income an organization has earned.
  • An increase in owners’ equity during the period by performing a service or selling an asset.

    • Owners’ Equity arrow_upward


  • Owners’ ownership (equity) in the business, or the amount of the business assets owned by the business owners.
  • An individual or company's net worth.
  • Used in determining an individual's or company's creditworthiness, and can be used in determining the value of a business when its owner or shareholders want to sell.
  • This is calculated by taking the value of all assets and subtracting the value of all liabilities.
  • The portion of your assets that you can legally claim.

    • Fundamental Accounting Equation arrow_upward


  • In the GAAP framework, there must be a continuous equilibrium between assets on one side and the total of liabilities and equity on other side.
  • This is represented by the fundamental equation of accounting:
  • The recording of every transaction must keep this equation in balance, for which double entry book-keeping is employed.

    • Assets (owns)

    What the business owns

    Liabilities (owes)

    What the business owes

    Owners’ Equity (worth)

    What is the worth of the business



    Example of Owners’ Equity arrow_upward


  • Company A purchased a building for $500,000 with a 10% down payment ($50,000):

    • Ways of Money In arrow_upward



    Operations

  • Payments from customers
  • Refunds from suppliers

    • Financing

  • Investment by owners
  • Investment by creditors (loans)

    • Investing

  • Return on Investments (interest and dividend)
  • Proceeds from Selling Assets
  • Repayment of amounts loaned to other entities


    • Ways of Money Out arrow_upward



    Operations

  • Payments to suppliers
  • Refunds to customers

    • Financing

  • Payment of dividends or capital to owners
  • Repayment of creditors

    • Investing

  • Purchase of Assets
  • Amounts invested in other entities (debt or equity)


    • Core Components of Accounting arrow_upward


  • Balance Sheet:
  • Income statement or profit and loss statement (P&L):

    • Balance Sheet arrow_upward


  • It shows a net worth of a business.
  • The amounts presented on the balance sheet are aggregated from the entity’s beginning to the balance sheet date.
  • Provides following:

    • Income Statement arrow_upward


  • It is a company's financial statement that indicates how the revenue is transformed into the net income.
  • It’s accounts are temporary accounts.
  • The amounts presented in the income statement are aggregated from the beginning of the period to the end of the period only.
  • It is used to determine the net income or net loss of an individual or business for a defined period of time.

    • Sarbanes-Oxley arrow_upward


  • The Sarbanes-Oxley act (2002) emphasizes the importance of internal control.
  • Requires companies and their independent accountants to report on the effectiveness of the company’s internal controls.
  • The major provisions of the act established the Public Company Accounting Oversight Board (PCAOB).

    • Internal Controls arrow_upward


  • Internal control is defined as a process affected by an organization's structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives.
  • Policies and procedures:

    • Objective of Internal Controls arrow_upward


  • Provides reasonable assurance that:

    • Elements of Internal Controls arrow_upward


  • Risk Assessment
  • Control Procedures
  • Monitoring
  • Information and Communication


    • Thank You from Kimavi arrow_upward


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