Introduction to Accountancy

• Accountancy is the process of recording, classifying, summarizing, and interpreting financial transactions
• It is a systematic way of tracking a business's financial activities
• This information is crucial for making informed decisions
• It is often called the language of business
• Accountancy provides data for stakeholders to assess an organization's financial health and performance

Purposes of Accounting

• Measuring business income involves determining the profitability of a company over a specific period
• Decision-making relies on accurate and timely financial information to make informed choices
• Accountants communicate financial information to stakeholders
• Legal compliance ensures that businesses adhere to accounting standards and regulations
• Accountants maintain systematic records

Key Concepts

• Assets are resources controlled by a company as a result of past events and from which future economic benefits are expected to flow to the company
• Liabilities are present obligations of the company arising from past events, the settlement of which is expected to result in an outflow from the company of resources embodying economic benefits
• Equity represents the residual interest in the assets of the company after deducting all its liabilities
• Revenue is income arising in the course of an entity's ordinary activities
• Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants

Types of Accounting

• Financial accounting focuses on preparing financial statements for external users, adhering to GAAP or IFRS
• Management accounting provides information to internal users for decision-making, planning, and control
• Tax accounting involves preparing tax returns and planning for tax liabilities
• Auditing is the independent examination of financial statements to ensure fairness and reliability
• Forensic accounting involves investigating financial fraud and irregularities
• Government accounting deals with accounting for public sector entities
• Not-for-profit accounting focuses on accounting for organizations that do not have profit as their primary goal

Generally Accepted Accounting Principles (GAAP)

• GAAP is a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB)
• It aims to ensure that financial statements are relevant, reliable, and comparable
• GAAP is used in the United States
• Some key principles include:
  • Historical cost principle: Assets are recorded at their original cost
  • Revenue recognition principle: Revenue is recognized when earned and realized
  • Matching principle: Expenses are matched with the revenues they generate
  • Full disclosure principle: All relevant information is disclosed in the financial statements

International Financial Reporting Standards (IFRS)

• IFRS is a set of accounting standards issued by the International Accounting Standards Board (IASB)
• IFRS aims to provide a global framework for how public companies prepare and disclose their financial statements
• IFRS is used in many countries around the world
• Compared to GAAP, IFRS is often considered more principles-based, allowing for more professional judgment

The Accounting Equation

• The accounting equation is the fundamental equation in accounting and is expressed as: Assets = Liabilities + Equity
• Assets represent what a company owns
• Liabilities represent what a company owes to others
• Equity represents the owners' stake in the company
• The accounting equation must always be in balance

Financial Statements

• The income statement reports a company's financial performance over a period of time
• It shows revenues, expenses, and net income or net loss
• The balance sheet presents a company's assets, liabilities, and equity at a specific point in time
• It reflects the accounting equation: Assets = Liabilities + Equity
• The statement of cash flows reports the movement of cash both into and out of a company during a period
• It is categorized into operating, investing, and financing activities
• The statement of changes in equity reports changes in the equity accounts over a period

The Accounting Cycle

• The accounting cycle is a series of steps that companies use to record, classify, and summarize accounting data to produce financial statements
• It involves:
  • Identifying and analyzing transactions
  • Recording transactions in a journal
  • Posting journal entries to the general ledger
  • Preparing an unadjusted trial balance
  • Making adjusting entries
  • Preparing an adjusted trial balance
  • Preparing financial statements
  • Closing the books

Debits and Credits

• Debits and credits are used to record changes in the accounting equation
• Debits increase asset, expense, and dividend accounts and decrease liability, equity, and revenue accounts
• Credits increase liability, equity, and revenue accounts and decrease asset, expense, and dividend accounts
• The total debits must always equal the total credits for each transaction

Important Ratios

• Profitability ratios measure a company's ability to generate profits
• 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
• Activity ratios measure how efficiently a company is using its assets

Cost Accounting

• Cost accounting involves measuring, analyzing, and reporting costs
• It is used for internal decision-making
• Different costing methods include:
  • Job order costing: Used for unique or custom products
  • Process costing: Used for mass-produced, similar products
  • Activity-based costing (ABC): Assigns costs to activities and then to products or services

Budgeting

• Budgeting is the process of creating a financial plan for the future
• It involves estimating revenues and expenses
• Different types of budgets include:
  • Master budget: Comprehensive set of budgets for all departments and functions
  • Operating budget: Focuses on day-to-day revenues and expenses
  • Capital budget: Plans for long-term investments in assets
  • Cash budget: Forecasts cash inflows and outflows

Auditing

• Auditing is an independent examination of financial statements to ensure they are presented fairly
• Types of audits include:
  • External audit: Performed by an independent CPA firm
  • Internal audit: Performed by a company's internal audit department
  • Compliance audit: Determines whether an organization is following applicable laws and regulations
  • Forensic audit: Investigates financial fraud and irregularities

Introduction to accountancy, its purposes, and key concepts. Accountancy systematically tracks a business's activities, offering data to assess financial health and performance. It involves measuring income, supporting decisions, ensuring legal compliance, and maintaining financial records.