Business Accountancy: Core Concepts & Statements

• Business accountancy involves the processes of recording, classifying, summarizing, reporting, and interpreting financial transactions for businesses
• It provides stakeholders with essential information for decision-making
• Business accountancy encompasses various specialized fields

Core Concepts

• Assets represent a company's resources and possessions with future economic value
• Liabilities are obligations a company owes to others
• Equity is the owners' stake in the company, representing the residual interest in the assets after deducting liabilities
• The accounting equation (Assets = Liabilities + Equity) serves as the foundation of business accountancy

Financial Statements

• The income statement reports a company's financial performance over a period, detailing revenues, expenses, and net income or loss
• The balance sheet presents a company's assets, liabilities, and equity at a specific point in time, reflecting its financial position
• The statement of cash flows tracks the movement of cash both into and out of a company
• It is categorized by operating, investing, and financing activities
• The statement of changes in equity reconciles the beginning and ending balances of equity accounts during a period

Accounting Principles

• The historical cost principle dictates recording assets at their original purchase price
• The revenue recognition principle determines when revenue should be recognized, typically when earned and realized
• The matching principle requires expenses to be recognized in the same period as the revenues they helped generate
• The going concern assumption presumes a business will continue operating in the foreseeable future
• The accrual basis of accounting recognizes revenues and expenses when they are earned or incurred, regardless of cash flow

Accounting Standards

• Accounting standards are guidelines that govern the preparation and presentation of financial statements
• International Financial Reporting Standards (IFRS) are used globally
• Generally Accepted Accounting Principles (GAAP) are primarily used in the United States
• These standards ensure consistency and comparability in financial reporting

The Accounting Cycle

• The accounting cycle is a series of steps companies use to record, classify, and summarize accounting data
• Transactions are recorded in journals, which are then posted to the general ledger
• Worksheets are prepared to adjust entries
• Financial statements are prepared, and the books are closed

Depreciation

• Depreciation is the systematic allocation of the cost of a tangible asset over its useful life
• Straight-line depreciation allocates an equal amount of depreciation expense each year
• Declining balance methods accelerate depreciation expense in the early years of an asset's life
• Units of production depreciation allocates expense based on actual usage

Inventory Valuation

• First-In, First-Out (FIFO) assumes that the first units purchased are the first ones sold
• Last-In, First-Out (LIFO) assumes that the last units purchased are the first ones sold
• Weighted-average cost calculates a weighted average cost for all inventory items

Cost Accounting

• Cost accounting involves the measurement, analysis, and reporting of costs for decision-making
• Job order costing tracks costs for individual projects or jobs
• Process costing tracks costs for mass-produced, homogeneous products
• Activity-based costing (ABC) assigns costs to activities and then to products based on consumption of those activities

Financial Statement Analysis

• Ratio analysis involves calculating and interpreting financial ratios to assess a company's performance and financial health
• Liquidity ratios measure a company's ability to meet its short-term obligations
• Solvency ratios measure a company's ability to meet its long-term obligations
• Profitability ratios measure a company's ability to generate profits
• Efficiency ratios measure how efficiently a company utilizes its assets

Budgeting

• Budgeting is the process of creating a financial plan for the future
• Operating budgets plan for revenues and expenses
• Capital budgets plan for investments in long-term assets
• Cash budgets plan for cash inflows and outflows

Auditing

• Auditing is the independent examination of financial statements to ensure they are fairly presented
• Internal audits are conducted by employees within the organization
• External audits are conducted by independent outside auditors
• Audits provide assurance to stakeholders about the reliability of financial information

Taxation

• Taxation involves the laws and regulations governing the levying and collection of taxes
• Income tax is levied on taxable income
• Sales tax is levied on the sale of goods and services
• Property tax is levied on real estate and other property

Business Ethics

• Business ethics are moral principles that guide business conduct
• Integrity, objectivity, and confidentiality are essential
• Ethical behavior is critical for maintaining trust and credibility

Technology in Accounting

• Accounting software automates many accounting tasks, improving efficiency and accuracy
• Enterprise Resource Planning (ERP) systems integrate various business functions, including accounting
• Cloud computing enables access to accounting data and applications from anywhere
• Data analytics helps businesses gain insights from financial data