Financial Accounting Overview

Study Notes

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.

Description

Understand the basics of financial accounting, including financial statements, accounting principles, asset and liability classification, revenue recognition, and expenses. Learn about GAAP, accrual accounting, and the accounting equation.