Financial Accounting Fundamentals

Definition and Objectives

• Financial accounting is the process of recording, classifying, and reporting financial information of a business to stakeholders.
• Objectives:
  • Provide financial information to stakeholders (investors, creditors, management) to make informed decisions.
  • Ensure accountability and transparency in financial reporting.

Financial Statements

• Four main financial statements:
  1. Balance Sheet: snapshot of company's financial position at a specific point in time.
     • Assets = Liabilities + Equity
  2. Income Statement: revenue and expenses over a specific period (e.g., month, year).
     • Revenue - Expenses = Net Income
  3. Cash Flow Statement: inflows and outflows of cash over a specific period.
     • Operating, Investing, and Financing activities
  4. Statement of Stockholders' Equity: changes in equity over a specific period.

Accounting Principles

• GAAP (Generally Accepted Accounting Principles):
  • Assumptions: accounting entity, going concern, monetary unit, historical cost
  • Principles: matching, materiality, consistency, cost principle, full disclosure
• Accounting Equation: Assets = Liabilities + Equity

Asset Classification

• Current Assets:
  • Cash and cash equivalents
  • Accounts receivable
  • Inventory
  • Prepaid expenses
• Non-Current Assets:
  • Property, Plant, and Equipment (PPE)
  • Investments
  • Intangible assets

Liabilities and Equity

• Current Liabilities:
  • Accounts payable
  • Short-term loans
  • Taxes owed
• Non-Current Liabilities:
  • Long-term loans
  • Bonds payable
• Equity:
  • Common stock
  • Retained earnings
  • Dividends

Accounting Process

• Recording transactions: journal entries, ledgers, and trial balance
• Financial statement preparation: adjusting entries, closing entries, and financial statement preparation

Financial Accounting

• Financial accounting is the process of recording, classifying, and reporting financial information of a business to stakeholders.
• Objectives of financial accounting: provide financial information to stakeholders and ensure accountability and transparency in financial reporting.

Financial Statements

Balance Sheet

• Snapshot of company's financial position at a specific point in time.
• Formula: Assets = Liabilities + Equity.

Income Statement

• Revenue and expenses over a specific period (e.g., month, year).
• Formula: Revenue - Expenses = Net Income.

Cash Flow Statement

• Inflows and outflows of cash over a specific period.
• Classified into: Operating, Investing, and Financing activities.

Statement of Stockholders' Equity

• Changes in equity over a specific period.

Accounting Principles

• GAAP (Generally Accepted Accounting Principles):
  • Assumptions: accounting entity, going concern, monetary unit, historical cost.
  • Principles: matching, materiality, consistency, cost principle, full disclosure.
• Accounting Equation: Assets = Liabilities + Equity.

Asset Classification

Current Assets

• Cash and cash equivalents.
• Accounts receivable.
• Inventory.
• Prepaid expenses.

Non-Current Assets

• Property, Plant, and Equipment (PPE).
• Investments.
• Intangible assets.

Liabilities and Equity

Current Liabilities

• Accounts payable.
• Short-term loans.
• Taxes owed.

Non-Current Liabilities

• Long-term loans.
• Bonds payable.

Equity

• Common stock.
• Retained earnings.
• Dividends.

Accounting Process

• Recording transactions: journal entries, ledgers, and trial balance.
• Financial statement preparation: adjusting entries, closing entries, and financial statement preparation.

Learn the basics of financial accounting, including the objectives and main financial statements such as the balance sheet.