Financial Accounting Overview

Financial Accounting Overview

• Financial accounting is the process of recording, classifying, and reporting financial transactions and events of a business.
• It provides stakeholders with financial information to make informed decisions.

Financial Statements

• Balance Sheet: presents the company's financial position at a specific point in time, including assets, liabilities, and equity.
• Income Statement: reports revenues and expenses over a specific period, showing the company's profitability.
• Cash Flow Statement: shows the inflows and outflows of cash and cash equivalents over a specific period.
• Statement of Stockholders' Equity: reports changes in a company's equity over a specific period.

Accounting Principles

• GAAP (Generally Accepted Accounting Principles): a set of rules and guidelines for financial accounting and reporting.
• Accrual Accounting: recognizes revenues and expenses when earned or incurred, regardless of cash receipt or payment.
• Matching Principle: matches expenses with revenues in the same period.
• Materiality: only material transactions are reported.
• Consistency: accounting methods are consistent from period to period.

Accounting Equation

• Assets = Liabilities + Equity: the fundamental equation that represents the relationship between a company's assets, liabilities, and equity.

Asset Classification

• Current Assets: expected to be converted into cash within one year or less, such as cash, accounts receivable, and inventory.
• Non-Current Assets: not expected to be converted into cash within one year, such as property, plant, and equipment.
• Intangible Assets: non-physical assets, such as patents, copyrights, and trademarks.

Liability Classification

• Current Liabilities: expected to be paid within one year or less, such as accounts payable and short-term loans.
• Non-Current Liabilities: not expected to be paid within one year, such as long-term loans and bonds.

Revenue Recognition

• Revenue Recognition Criteria: four criteria must be met to recognize revenue:
  1. Persuasive evidence of an arrangement exists.
  2. Delivery has occurred or services have been rendered.
  3. Fees are fixed or determinable.
  4. Collectibility is reasonably assured.

Expenses and Depreciation

• Expenses: costs incurred to generate revenue, such as salaries, rent, and utilities.
• Depreciation: allocation of the cost of a non-current asset over its useful life.