Accountancy Principles and Financial Statements

Study Notes

Definition

Accountancy: The process of recording, classifying, summarizing, and interpreting financial transactions.

Key Concepts

Basic Principles
- Accrual Basis: Revenues and expenses are recorded when they are earned or incurred, not when cash is received or paid.
- Going Concern: Assumes that a business will continue to operate indefinitely.
- Consistency: Accounting methods should be applied consistently from one period to the next.
Financial Statements
- Balance Sheet: A snapshot of a company's financial position at a specific point in time. It includes:
  - Assets
  - Liabilities
  - Equity
- Income Statement: Shows a company's performance over a period. It includes:
  - Revenues
  - Expenses
  - Net Income (Profit or Loss)
- Cash Flow Statement: Reports the cash generated and used during a period. It includes:
  - Operating Activities
  - Investing Activities
  - Financing Activities
Double-Entry System
- Every transaction affects at least two accounts (debit and credit).
- Ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.
Key Terms
- Assets: Resources owned by a business (e.g., cash, inventory).
- Liabilities: Obligations owed to outsiders (e.g., loans, accounts payable).
- Equity: Owner’s claim on assets after liabilities are subtracted.
Types of Accountancy
- Financial Accounting: Focuses on reporting financial information to external parties.
- Management Accounting: Provides information for internal decision-making.
- Tax Accounting: Deals with tax-related matters and compliance.
- Auditing: Examination of financial records to ensure accuracy and adherence to standards.
Regulatory Framework
- Generally Accepted Accounting Principles (GAAP): Standards used in the U.S.
- International Financial Reporting Standards (IFRS): Standards used internationally.
- Securities and Exchange Commission (SEC): Regulatory authority for financial markets in the U.S.

Importance

Enables stakeholders to make informed decisions.
Facilitates transparency and accountability in financial reporting.
Helps in compliance with laws and regulations.

Definition

Accountancy involves recording, classifying, summarizing, and interpreting financial transactions to provide information about economic activities.

Key Concepts

Basic Principles:
- Accrual Basis: Records revenues and expenses when earned or incurred, regardless of cash flow timing.
- Going Concern: Assumes ongoing business operations indefinitely.
- Consistency: Requires uniform application of accounting methods across reporting periods.
Financial Statements:
- Balance Sheet: Reflects a company's financial position at a specific date, detailing assets, liabilities, and equity.
- Income Statement: Summarizes company performance over a period, showcasing revenues, expenses, and net income or loss.
- Cash Flow Statement: Tracks cash inflows and outflows over a period, categorized into operating, investing, and financing activities.
Double-Entry System:
- Each financial transaction triggers entries in at least two accounts (debit and credit) to maintain balance in the accounting equation (Assets = Liabilities + Equity).
Key Terms:
- Assets: Resources a business owns, such as cash and inventory.
- Liabilities: Debt obligations to external parties, including loans and payables.
- Equity: The ownership interest in a company, calculated as assets minus liabilities.
Types of Accountancy:
- Financial Accounting: Focuses on external financial reporting to stakeholders.
- Management Accounting: Provides internal financial information for strategic decision-making.
- Tax Accounting: Involves managing tax obligations and compliance with tax laws.
- Auditing: Involves reviewing financial statements for accuracy and regulatory compliance.
Regulatory Framework:
- Generally Accepted Accounting Principles (GAAP): Established standards for financial reporting in the U.S.
- International Financial Reporting Standards (IFRS): Global accounting standards for international use.
- Securities and Exchange Commission (SEC): U.S. regulatory body overseeing financial market operations and compliance.

Importance

Accountancy provides crucial insights for stakeholders to make informed financial decisions.
Promotes transparency and accountability in financial reporting.
Ensures compliance with relevant laws and regulations, fostering trust in financial practices.

Description

Test your knowledge on the fundamental principles of accountancy and the key financial statements used in business. This quiz covers concepts like accrual basis, going concern, and methods of recording financial transactions. Ideal for students or anyone looking to understand the basics of accounting.