Accounting Basics

Definition and Purpose

• Accounting: the process of recording, classifying, reporting, and analyzing financial transactions and events of a business
• Purpose: to provide financial information that is useful for decision-making and accountability

Branches of Accounting

• Financial Accounting: focuses on preparing financial statements for external users (investors, creditors)
• Managerial Accounting: focuses on providing financial information for internal decision-making
• Cost Accounting: focuses on calculating the cost of products or services
• Tax Accounting: focuses on preparing tax returns and ensuring compliance with tax laws
• Auditing: examines the accuracy and reliability of financial statements

Financial Statements

• Balance Sheet: presents the company's financial position at a specific point in time
  • Assets = Liabilities + Equity
• Income Statement: presents the company's revenues, expenses, and net income over a specific period
• Cash Flow Statement: presents the company's inflows and outflows of cash over a specific period

Accounting Principles

• Accrual Accounting: recognizes revenues and expenses when earned or incurred, regardless of when cash is received or paid
• Cash Basis Accounting: recognizes revenues and expenses when cash is received or paid
• Matching Principle: matches expenses with revenues in the same period
• Materiality: discloses information that could impact the decision-making of users
• Consistency: uses consistent accounting methods and procedures from period to period

Accounting Equation

• Assets: resources owned or controlled by the business
• Liabilities: debts or obligations of the business
• Equity: ownership interest in the business
• Assets = Liabilities + Equity

Accounting Overview

• Accounting is the process of recording, classifying, reporting, and analyzing financial transactions and events of a business.

Branches of Accounting

• Financial Accounting: prepares financial statements for external users, such as investors and creditors.
• Managerial Accounting: provides financial information for internal decision-making.
• Cost Accounting: calculates the cost of products or services.
• Tax Accounting: prepares tax returns and ensures compliance with tax laws.
• Auditing: examines the accuracy and reliability of financial statements.

Financial Statements

Balance Sheet

• Presents a company's financial position at a specific point in time.
• The accounting equation: Assets = Liabilities + Equity.

Income Statement

• Presents a company's revenues, expenses, and net income over a specific period.

Cash Flow Statement

• Presents a company's inflows and outflows of cash over a specific period.

Accounting Principles

Accrual Accounting

• Recognizes revenues and expenses when earned or incurred, regardless of when cash is received or paid.

Cash Basis Accounting

• Recognizes revenues and expenses when cash is received or paid.

Matching Principle

• Matches expenses with revenues in the same period.

Materiality

• Discloses information that could impact the decision-making of users.

Consistency

• Uses consistent accounting methods and procedures from period to period.

Accounting Equation

• Assets: resources owned or controlled by the business.
• Liabilities: debts or obligations of the business.
• Equity: ownership interest in the business.