Accounting Basics and Financial Statements

Accounting Basics

• Accounting records and analyzes financial transactions for a business.
• It helps manage finances, make informed decisions, and track performance.
• Accounting principles and standards ensure consistency and reliability in financial reporting.

Conceptual Framework of Financial Statements

• Sets out the objectives, concepts, and principles that underpin financial reporting.
• This framework aims to ensure financial statements are relevant, reliable, comparable, and understandable.
• Fundamental concepts include going concern, accrual accounting, and the matching principle.

Accounting Policies

• Specific rules and treatments a company adopts to apply accounting standards to its financial activities.
• These policies are typically disclosed in the financial statements.
• Examples include inventory valuation methods (FIFO or LIFO) and depreciation methods.

Journal Entries

• The initial record of every financial transaction.
• They follow the double-entry bookkeeping system, where each transaction affects at least two accounts.
• A journal entry includes the date, accounts affected, debit and credit amounts, and a brief description.

Preparation of Accounts

• Journal entries are summarized and categorized into ledgers, which provide a detailed account balance for each item.
• This information is used for preparing financial statements.

###Trial Balance

• A list of all account balances at a specific point in time.
• It ensures the accounting equation (Assets = Liabilities + Equity) balances.
• A trial balance helps identify and correct errors before preparing the financial statements.

Balance Sheet and Profit and Loss Statement

• The Balance Sheet presents a company's financial position at a specific point in time.
• It shows assets (what the company owns), liabilities (what the company owes), and equity (the owners' stake).
• The Profit and Loss Statement (or Income Statement) summarizes revenues and expenses over a period of time, determining a company's net income or loss.

Branches of Accounting

• Cost Accounting focuses on the costs of production and distribution.
• Financial Accounting provides information to external users like investors and creditors.
• Management Accounting provides information to internal users like managers for decision-making.

Introduction to Accounting

• Accounting: The process of identifying, measuring, and communicating financial information about an entity to users for decision-making.
• Key Users of Accounting Information: Investors, Creditors, Management, Employees, Government Agencies.

Accounting Concepts

• Accrual Accounting: Transactions are recorded when they occur, regardless of when cash is received or paid.
• Going Concern: Assumes the business will continue operating in the foreseeable future.
• Matching Principle: Expenses are recognized in the same period as the revenue they help generate.
• Consistency: Same accounting methods are applied from period to period for comparability.

Conceptual Framework of Financial Statements

• Objective of Financial Reporting: Provide information about the entity to help users make decisions about providing resources to the entity.
• Qualitative Characteristics of Financial Information: Relevance, Reliability, Comparability, Understandability.
• Elements of Financial Statements: Assets, Liabilities, Equity, Income, Expenses.

Accounting Policies

• Accounting Policies: Specific methods and procedures chosen by management to account for transactions.
• Disclosure Requirements: Companies are required to disclose their accounting policies in their financial statements.

Journal Entries and Preparation of Accounts

• Journal: A chronological record of all accounting transactions.
• Ledger: A collection of accounts that summarizes the balance of each account.
• Double-Entry System: Every transaction affects at least two accounts, with one debit and one credit.

Trial Balance to Balance Sheet and Profit & Loss

• Trial Balance: A summary of all account balances at a specific point in time.
• Balance Sheet: Reports the company's assets, liabilities, and equity at a specific point in time.
• Profit and Loss (Income) Statement: Shows the company's revenues and expenses over a period of time.

Branches of Accounting

• Cost Accounting: Focuses on the cost of producing goods and services.
• Financial Accounting: Reports on the financial performance and position of a company to external users.
• Management Accounting: Provides internal information to managers for decision-making.