Accounting Principles and GAAP

• Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.
• It involves recording, classifying, and summarizing financial transactions.
• Accounting provides information for various stakeholders, including owners, managers, investors, creditors, and government agencies.

Accounting Principles

• Accounting principles are the fundamental rules and guidelines that companies must follow when preparing financial statements.
• These principles ensure consistency and comparability in financial reporting.
• Generally Accepted Accounting Principles (GAAP) are a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB).
• GAAP aims to improve the clarity, consistency, and comparability of financial information.

Basic Accounting Principles

• Business Entity Principle: Requires that the financial affairs of a business be kept separate and distinct from the personal financial affairs of its owners.
• Money Measurement Principle: States that only transactions and events that can be measured in monetary terms are recorded in the accounting records.
• Going Concern Principle: Assumes that the business will continue to operate for the foreseeable future.
• Cost Principle: Requires assets to be recorded at their original cost.
• Dual Aspect Principle: Recognizes that every transaction affects at least two accounts.
• Revenue Recognition Principle: Dictates when revenue should be recognized.
• Matching Principle: Expenses should be recognized in the same period as the revenues they helped to generate.
• Accrual Basis Principle: Revenues and expenses are recognized when they are earned or incurred, regardless of when cash changes hands.
• Objectivity Principle: Financial statements should be based on verifiable evidence.
• Consistency Principle: A company should use the same accounting methods from period to period.
• Conservatism Principle: When in doubt, choose the option that is least likely to overstate assets or income and understate liabilities or expenses.
• Materiality Principle: Only information that is significant enough to influence the decisions of users needs to be disclosed.
• Full Disclosure Principle: All relevant information that could affect a user's understanding of the financial statements should be disclosed.

Financial Accounting

• Financial accounting is the branch of accounting that focuses on preparing financial statements for external users.
• These statements provide information about a company's financial performance and position.
• Key financial statements include the balance sheet, income statement, statement of cash flows, and statement of changes in equity.

Balance Sheet

• A snapshot of a company's assets, liabilities, and equity at a specific point in time.
• Assets represent what the company owns (e.g., cash, accounts receivable, inventory).
• Liabilities represent what the company owes to others (e.g., accounts payable, loans).
• Equity represents the owners' stake in the company (assets minus liabilities).
• The accounting equation: Assets = Liabilities + Equity.

Income Statement

• Reports a company's financial performance over a period of time (e.g., a quarter or a year).
• Revenue is the income generated from the company's primary business activities.
• Expenses are the costs incurred to generate revenue.
• Net income (or net loss) is the difference between total revenues and total expenses.
• Net income is often referred to as the "bottom line".
• Cost of Goods Sold (COGS) represents the direct costs of producing goods or services.
• Gross profit is calculated as revenue minus cost of goods sold.

Statement of Cash Flows

• Summarizes the movement of cash both into and out of a company during a specific period of time.
• Operating activities: Cash flows from the normal day-to-day business activities.
• Investing activities: Cash flows from the purchase and sale of long-term assets (e.g., property, plant, and equipment).
• Financing activities: Cash flows from debt and equity financing (e.g., borrowing money, issuing stock).
• Helps users assess a company's ability to generate cash.

Statement of Changes in Equity

• Reconciles the beginning and ending balances of equity accounts.
• Includes information about net income, dividends, stock issuances, and other changes affecting equity.
• Shows how the owners' stake in the company has changed over time.

Key Accounting Concepts

• Assets: Resources controlled by a company as a result of past events and from which future economic benefits are expected to flow to the company.
• Liabilities: Present obligations of a company arising from past events, the settlement of which is expected to result in an outflow from the company of resources embodying economic benefits.
• Equity: The residual interest in the assets of a company after deducting all its liabilities; represents the owners' stake in the company.
• Revenue: Inflows or other enhancements of assets of a company or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the company's ongoing major or central operations.
• Expenses: Outflows or other consumption of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the company's ongoing major or central operations.

Accounting Cycle

• A series of steps followed to record, process, and report financial transactions.
• Identification and Measurement of Transactions: Identifying transactions and events that need to be recorded.
• Journalizing: Creating journal entries to record the transactions
• Posting to the Ledger: Transferring journal entries to the general ledger accounts
• Preparation of Trial Balance: Preparing a trial balance to ensure debits equal credits
• Adjusting Entries: Making adjusting entries to account for accruals and deferrals.
• Adjusted Trial Balance: Preparing an adjusted trial balance after adjusting entries.
• Financial Statement Preparation: Preparing the financial statements (income statement, balance sheet, statement of cash flows, and statement of changes in equity).
• Closing Entries: Closing temporary accounts (revenue, expenses, and dividends) to retained earnings.
• Post-Closing Trial Balance: Preparing a post-closing trial balance to ensure the accounting equation is in balance after closing entries.

Accounting Standards

• Financial statements should follow applicable accounting standards to maintain clarity and comparability.
• International Financial Reporting Standards (IFRS) is used in many parts of the world.
• Differences exist between GAAP and IFRS, but efforts are being made to converge the two sets of standards.

Importance of Accounting

• Provides information for decision-making.
• Helps monitor the financial performance of a business.
• Ensures compliance with laws and regulations.
• Facilitates communication with stakeholders.
• Supports effective resource allocation.