Basic Concepts of Accounting

Definition: Accounting is the systematic process of recording, measuring, and communicating financial information.
Purpose: To provide stakeholders with useful financial information for decision-making.

Assets: Resources owned by a business (e.g., cash, inventory, property).
Liabilities: Obligations or debts owed by a business (e.g., loans, accounts payable).
Equity: Owner's residual interest in the assets after liabilities are deducted (e.g., common stock, retained earnings).

Formula: Assets = Liabilities + Equity
Represents the relationship between a company’s resources and the claims against those resources.

Financial Accounting: Focuses on the preparation of financial statements for external users.
Managerial Accounting: Provides information for internal decision-making (e.g., budgeting, forecasting).
Tax Accounting: Compliance with tax regulations and preparation of tax returns.
Auditing: Independent examination of financial statements to ensure accuracy and compliance.

Balance Sheet: A snapshot of a company’s financial position at a specific date.
- Components: Assets, Liabilities, Equity.
Income Statement: Shows revenue and expenses over a period, resulting in net profit or loss.
- Key terms: Revenue, Cost of Goods Sold (COGS), Operating Expenses, Net Income.
Statement of Cash Flows: Tracks cash inflows and outflows across operating, investing, and financing activities.
Statement of Changes in Equity: Details the movement in equity accounts over a specific period.

Generally Accepted Accounting Principles (GAAP): A framework of accounting standards and procedures.
International Financial Reporting Standards (IFRS): Global accounting standards used in many countries.
Accrual Basis: Revenues and expenses are recorded when they are earned or incurred, not when cash is exchanged.
Consistency: The same accounting principles should be applied from one period to the next.
Materiality: Financial information should be significant enough to influence decisions.

Transaction Analysis: Identify and analyze financial transactions.
Journal Entries: Record transactions in journals.
Ledger Posting: Transfer journal entries to the general ledger.
Trial Balance: Summarize all ledger accounts to verify that debits equal credits.
Adjustments: Make necessary adjustments for accruals and deferrals.
Financial Statements Preparation: Create financial statements from adjusted trial balance.
Closing Entries: Close temporary accounts and prepare for the next accounting period.

Accountant: Prepares and analyzes financial statements.
Auditor: Reviews and verifies the accuracy of financial statements and compliance.
Controller: Oversees accounting operations and reporting within an organization.
CFO (Chief Financial Officer): Senior executive responsible for financial planning and risk management.

Integrity: Accountants must act in honesty and fairness.
Objectivity: Avoid bias, conflicts of interest, or undue influence when preparing financial reports.
Confidentiality: Respect privacy and confidentiality of client information.

Accounting is a systematic process of recording, measuring, and communicating financial information.
Its primary purpose is to help stakeholders make informed decisions by providing useful financial information.

Assets are resources controlled by a business. Examples include cash, inventory, and property.
Liabilities are obligations owed by a business. Examples include loans, accounts payable, and salary payable.
Equity represents the owner's residual interest in the business after liabilities are deducted. Examples include common stock and retained earnings.

Assets = Liabilities + Equity.
This equation shows the fundamental relationship between resources and claims against those resources.

Financial accounting focuses on preparing financial statements for external users, such as investors and lenders.
Managerial accounting provides information for internal decision-making, including budgeting and forecasting.
Tax accounting deals with compliance with tax laws and the preparation of tax returns.
Auditing is the independent examination of financial statements to ensure accuracy and compliance.

The balance sheet is a snapshot of a company's financial position at a specific date. It lists assets, liabilities, and equity.
The income statement shows a company's revenue and expenses over a period, resulting in net profit or loss. Key items include revenue, cost of goods sold (COGS), operating expenses, and net income.
The statement of cash flows tracks cash inflows and outflows across operating, investing, and financing activities.
The statement of changes in equity details the movement in equity accounts over a specific period.

Generally Accepted Accounting Principles (GAAP) are a framework of accounting standards and procedures used in the United States.
International Financial Reporting Standards (IFRS) are global accounting standards used in many countries.
Accrual basis accounting records revenues and expenses when they are earned or incurred, not when cash is exchanged.
Consistency requires applying the same accounting principles from one period to the next.
Materiality dictates that financial information should be significant enough to influence decisions.

The accounting cycle is a systematic process for recording, summarizing, and reporting financial transactions.
It includes: analyzing transactions, recording them in journals, posting to the general ledger, preparing a trial balance, making adjustments, preparing financial statements, and closing temporary accounts.

Accountants are responsible for preparing and analyzing financial statements.
Auditors independently review and verify the accuracy and compliance of financial statements.
Controllers oversee accounting operations and reporting within an organization.
The Chief Financial Officer (CFO) is a senior executive responsible for financial planning and risk management.

Popular accounting software options include QuickBooks, Xero, Sage, and FreshBooks.

Integrity requires accountants to act in honesty and fairness.
Objectivity demands avoiding bias, conflicts of interest, or undue influence when preparing financial reports.
Confidentiality mandates respecting the privacy and confidentiality of client information.