Introduction to Accountancy

• Accountancy is the process of recording, classifying, summarizing, and interpreting financial transactions
• Its main goal is to provide accurate and reliable financial information to stakeholders
• Stakeholders include investors, creditors, management, and regulatory agencies
• Accountancy helps in making informed decisions about resource allocation and performance evaluation

Types of Accountancy

• Financial Accounting focuses on preparing financial statements for external users
• It adheres to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS)
• Management Accounting provides information to internal users for decision-making, planning, and control
• Cost Accounting determines the cost of products or services
• Tax Accounting involves preparing tax returns and planning for tax liabilities
• Auditing involves the independent examination of financial statements
• Forensic Accounting investigates financial fraud and irregularities
• Government Accounting focuses on the accounting practices of government entities
• Non-Profit Accounting addresses the unique accounting needs of non-profit organizations

Key Concepts in Accountancy

• Assets are resources controlled by an entity as a result of past events
• Liabilities are present obligations of the entity arising from past events
• Equity represents the residual interest in the assets of the entity 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
• The accounting equation is Assets = Liabilities + Equity
• The going concern principle assumes that the entity will continue to operate in the foreseeable future
• The matching principle requires expenses to be recognized in the same period as the related revenue
• The accrual basis of accounting recognizes revenue when earned and expenses when incurred, regardless of cash flow
• The cost principle states that assets should be recorded at their original cost

Financial Statements

• The income statement reports a company's financial performance over a period of time
• It includes revenue, 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 follows the accounting equation: Assets = Liabilities + Equity
• The statement of cash flows summarizes the movement of cash both into and out of a company
• There are three sections of a statement of cash flows: operating, investing, and financing activities
• The statement of retained earnings shows the changes in retained earnings over a period of time
• Retained earnings are the accumulated profits of the company that have not been distributed as dividends
• Notes to financial statements provide additional information and explanations about the items in the financial statements

Accounting Cycle

• Identification of transactions and events
• Journalizing transactions by entering them in the general journal
• Posting journal entries to the general ledger accounts
• Preparing a trial balance to ensure debits equal credits
• Making adjusting entries to account for accruals and deferrals
• Preparing an adjusted trial balance
• Preparing the financial statements
• Closing the temporary accounts (revenue, expense, and dividend accounts)
• Preparing a post-closing trial balance

Accounting Standards

• GAAP (Generally Accepted Accounting Principles) are the accounting standards used in the United States
• IFRS (International Financial Reporting Standards) are used in many other countries around the world
• The Financial Accounting Standards Board (FASB) sets accounting standards in the United States
• The International Accounting Standards Board (IASB) develops IFRS
• The Securities and Exchange Commission (SEC) regulates publicly traded companies in the United States and requires them to file financial reports prepared in accordance with GAAP

Financial Ratios

• Liquidity ratios measure a company's ability to meet its short-term obligations
• Examples include the current ratio and the quick ratio
• Solvency ratios measure a company's ability to meet its long-term obligations
• Examples include the debt-to-equity ratio and the times interest earned ratio
• Profitability ratios measure a company's ability to generate profits
• Examples include the gross profit margin, net profit margin, and return on equity
• Activity ratios measure a company's efficiency in using its assets
• Examples include the inventory turnover ratio and the accounts receivable turnover ratio

Cost Accounting Methods

• Job order costing is used when products or services are unique and can be easily identified
• Process costing is used when products are mass-produced and similar in nature
• Activity-based costing (ABC) assigns costs to activities and then allocates those costs to products or services
• Standard costing involves setting predetermined costs for materials, labor, and overhead
• Marginal costing (or variable costing) only includes variable costs in the cost of a product

Auditing

• An audit is an independent examination of financial statements
• The purpose of an audit is to provide an opinion on whether the financial statements are fairly presented in accordance with applicable accounting standards
• Internal audits are conducted by employees of the organization
• External audits are conducted by independent auditors
• The auditor's opinion can be unqualified, qualified, adverse, or a disclaimer
• An unqualified opinion means the financial statements are fairly presented
• A qualified opinion means the financial statements are fairly presented except for a specific matter
• An adverse opinion means the financial statements are not fairly presented
• A disclaimer of opinion means the auditor could not form an opinion on the financial statements

Taxation

• Taxable income is income that is subject to tax
• Deductions are expenses that can be subtracted from gross income to arrive at taxable income
• Tax credits directly reduce the amount of tax owed
• Different types of taxes include income tax, sales tax, property tax, & payroll tax
• Income tax can be levied on individuals and corporations
• Tax planning involves strategies to minimize tax liabilities
• Tax evasion is illegal, while tax avoidance is legal as long as it stays within the framework of the law

Ethical Considerations

• Accountants have a responsibility to act with integrity, objectivity, and due care
• The AICPA Code of Professional Conduct provides guidance on ethical behavior for accountants
• Conflicts of interest should be avoided or disclosed
• Confidentiality of client information is essential
• Accountants should maintain independence in performing audits and other assurance services

Current Trends

• Increasing use of technology, such as artificial intelligence and blockchain, in accounting processes
• Greater emphasis on sustainability reporting and environmental, social, and governance (ESG) factors
• Focus on data analytics to extract insights from financial and non-financial data
• Growing importance of cybersecurity in protecting financial information
• Continuous changes in accounting standards and regulations due to globalization and technological advancements