Introduction to accounting

• Accounting involves recording, summarizing, analyzing, and reporting an organization's financial transactions.
• Accounting provides insights into an organization's financial performance, position, and cash flows.
• Stakeholders such as investors, creditors, management, and regulators use accounting to make informed decisions.

Key Financial Statements

• The income statement shows a company's financial performance over a period, including revenues, expenses, and net income or loss.
• The balance sheet shows a company's assets, liabilities, and equity at a specific time, based on the accounting equation: Assets = Liabilities + Equity.
• The statement of cash flows tracks cash movement in and out of a company during a period, divided into operating, investing, and financing activities.
• The statement of changes in equity shows changes in a company's equity accounts during a reporting period.

Generally Accepted Accounting Principles (GAAP)

• GAAP is a set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB).
• GAAP ensures financial statements are relevant, reliable, comparable, and consistent.
• Public companies in the U.S. must follow GAAP, which also provides a framework for private companies.

International Financial Reporting Standards (IFRS)

• The International Accounting Standards Board (IASB) issues IFRS, a set of accounting standards.
• Many countries use IFRS, which provides a global financial reporting framework.
• IFRS is principle-based, focusing on the substance of transactions rather than strict rules.

Core Accounting Concepts

• Accrual accounting recognizes revenues when earned and expenses when incurred, regardless of cash flow.
• The matching principle requires recognizing expenses in the same period as the revenues they generate.
• The going concern assumption presumes a business will continue operating in the foreseeable future.
• The economic entity assumption separates a business's financial activities from its owners'.
• The monetary unit assumption requires measuring and reporting transactions in a stable monetary unit.
• The time period assumption divides a company's life into discrete reporting periods.

Types of Accounting

• Financial accounting prepares financial statements for external users like investors and creditors.
• Managerial accounting provides information for internal users like managers to aid decision-making.
• Tax accounting prepares tax returns and plans for tax liabilities according to tax laws and regulations.
• Cost accounting determines the cost of products, processes, and activities to help management control costs and improve efficiency.
• Forensic accounting investigates financial fraud and irregularities, often in legal proceedings.
• Governmental accounting focuses on accounting practices of state and local governmental units.
• Non-profit accounting focuses on the accounting practices of non-profit organizations.

The Accounting Cycle

• The accounting cycle is a series of steps businesses use to record and report financial data.
• Journalizing involves recording transactions in the general journal, including the date, accounts, and amounts.
• The ledger contains all business accounts, with debit and credit entries for each transaction.
• A trial balance lists all general ledger accounts with their balances to ensure debits equal credits.
• Adjusting entries update accounts for accruals and deferrals at the end of an accounting period.
• Financial statements are prepared using the adjusted trial balance, providing information on financial performance and position.
• Closing entries transfer temporary account balances (revenues, expenses, and dividends) to retained earnings.

Key Accounting Ratios

• Profitability ratios measure a company's ability to generate profits from revenues and assets.
• Liquidity ratios measure a company's ability to meet short-term obligations.
• Solvency ratios measure a company's ability to meet long-term obligations.
• Activity ratios measure how efficiently a company uses its assets.

Important Formulas and Equations

• Assets = Liabilities + Equity constitutes the Accounting Equation.
• Revenue - Expenses = Net Income on the Income Statement.
• Current Assets / Current Liabilities = Current Ratio (Liquidity).
• Net Income / Net Sales = Profit Margin (Profitability).
• Debt / Equity = Debt to Equity Ratio (Solvency).
• Cost of Goods Sold / Average Inventory = Inventory Turnover (Efficiency).

Cost Accounting Methods

• Job order costing assigns costs to individual projects or jobs.
• Process costing assigns costs to homogeneous products that are mass-produced.
• Activity-based costing (ABC) assigns costs to activities and then to products based on their consumption of activities.

Depreciation Methods

• Straight-line depreciation allocates an asset's cost equally over its useful life.
• Double-declining balance depreciation is an accelerated method that depreciates an asset at twice the straight-line rate.
• Units of production depreciation allocates an asset's cost based on its actual use or output.

Inventory Valuation Methods

• First-In, First-Out (FIFO) assumes the first units purchased are the first units sold.
• Last-In, First-Out (LIFO) assumes the last units purchased are the first units sold.
• Weighted-Average Cost calculates a weighted average cost for all units and uses this cost to determine the cost of goods sold and ending inventory.

Internal Controls

• Internal controls are policies and procedures to protect company assets, ensure reliable financial reporting, and promote operational efficiency.
• Common internal controls include segregation of duties, authorization and approval processes, physical safeguards, and regular reconciliations.

Auditing

• Auditing examines a company's financial statements to ensure fair presentation according to GAAP or IFRS.
• Independent auditors offer an objective opinion on financial statement fairness, enhancing credibility.

Ethical Considerations

• Accountants have a professional duty to act with integrity, objectivity, and confidentiality.
• Ethical dilemmas can arise, requiring accountants to make tough decisions based on ethics and standards.

Accounting is the process of recording, summarizing, and reporting financial transactions. It offers insights into financial performance and cash flow. Key statements include the income statement, balance sheet, and cash flow statement.