Introduction to Accountancy & Financial Accounting

Introduction to Accountancy

• Accountancy is the process of recording, classifying, summarizing, and interpreting financial transactions.
• It provides a structured framework for businesses and organizations to manage their financial resources.
• It involves the use of accounting principles and standards to ensure accuracy and reliability of financial statements.

Financial Accounting

• Financial accounting focuses on preparing financial statements for external users such as investors, creditors, and regulatory agencies.
• These statements provide a snapshot of an organization's financial performance and position.
• Key financial statements:
  • Income statement: Reports the financial performance over a specific period. It details revenues and expenses.
  • Balance sheet: Presents a snapshot of the company's assets, liabilities, and equity at a specific point in time. assets = liabilities + equity.
  • Statement of cash flows: Shows the movement of cash inflows and outflows over a period. Categorized by operating, investing, and financing activities.

Key Accounting Principles

• Accrual accounting: Recognizes revenues and expenses when they are earned or incurred, not necessarily when cash is received or paid. This differs from cash-basis accounting.
• Matching principle: Expenses are matched with revenues in the period they are incurred to generate the revenue.
• Conservatism principle: When uncertain, choose the option least likely to overstate assets/revenues or understate liabilities/expenses.
• Consistency principle: Apply the same accounting method consistently over time for comparability.

Double-Entry Bookkeeping

• A fundamental accounting concept.
• Each transaction affects at least two accounts.
• Debit and credit are used to record transactions. Total debits must equal total credits.
• This system ensures the Assets = Liabilities + Equity equation always balances.

Accounting Standards

• International Financial Reporting Standards (IFRS) is a set of global accounting standards.
• Generally Accepted Accounting Principles (GAAP) are accounting standards in the United States, distinct from IFRS.
• These standards aim to improve the transparency and comparability of financial information globally.

Key Aspects of Financial Statements Analysis

• Trend analysis: Comparing financial data over time to identify trends and patterns.
• Ratio analysis: Calculating financial ratios to assess profitability, liquidity, and solvency.

Common Financial Ratios

• Profit margin: Measures profitability – net income divided by revenue.
• Current ratio: Measures short-term liquidity – current assets divided by current liabilities.
• Debt-to-equity ratio: Measures the proportion of debt to equity financing – total debt divided by total equity.
• Return on assets (ROA): Measures asset use efficiency – net income divided by average total assets.

Limitations of Financial Accounting

• Financial information is historical, and might not reflect current conditions or future prospects.
• Accounting data can be subjective, needing estimates.
• Different companies in a similar industry can utilize varied accounting practices.
• Financial information is often presented in aggregated form, making segment-level analysis beneficial.
• Financial accounting standards evolve over time.