Introduction to Accounting Principles

• Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions to provide information for decision-making.
• It is often called the "language of business" because it communicates financial information to various stakeholders.

Core Concepts

• The fundamental accounting equation is Assets = Liabilities + Equity.
• Assets are resources owned by a company that have future economic value.
• Liabilities are obligations of a company to transfer assets or provide services to others in the future.
• Equity represents the owners' stake in the company's assets after deducting liabilities.

Key Financial Statements

• The income statement reports a company's financial performance over a period of time, presenting revenues, expenses, and net income or loss.
• Revenue includes cash inflows from selling goods or services
• Expenses include cash outflows from the normal operation of the business
• The balance sheet presents a company's assets, liabilities, and equity at a specific point in time.
• The statement of cash flows reports the movement of cash both into and out of a company over a period of time, categorized into operating, investing, and financing activities.
• Operating activities result from normal business operations such as revenue or expenses
• Investing activities include the purchase and sale of long term assets such as property plant and equipment (PP&E)
• Financing activities include debt, equity and dividends

Accounting Principles

• Generally Accepted Accounting Principles (GAAP) are a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB).
• GAAP aims to ensure financial statements are relevant, reliable, and comparable.
• The historical cost principle requires assets to be recorded at their original cost.
• The revenue recognition principle dictates when revenue should be recognized, typically when earned and realized or realizable.
• The matching principle requires expenses to be matched with the revenues they helped generate in the same accounting period.
• The full disclosure principle requires companies to disclose all information that could affect users' decisions.
• The going concern assumption assumes that a business will continue to operate in the foreseeable future.
• The monetary unit assumption states that accounting transactions should be measured in a stable monetary unit.
• The economic entity assumption states that the transactions of a business are separate from the personal transactions of its owners.

The Accounting Cycle

• The accounting cycle is a series of steps followed to record, process, and report financial information.
• Step 1: Identify and analyze transactions: Determine which events are accountable and need to be recorded
• Step 2: Journalize transactions: Record each transaction in the general journal in chronological order as journal entries using debits and credits
• Step 3: Post to the ledger: Transfer journal entries to individual accounts in the general ledger
• Step 4: Prepare a trial balance: Summarize all debit and credit balances to ensure they are equal
• Step 5: Prepare a worksheet (optional): To adjust for accruals and deferrals to ensure proper accounting
• Step 6: Prepare financial statements: Utilize the balances to create the income statement, balance sheet, and the statement of cash flows
• Step 7: Adjusting entries: Update the accounts as required per accrual accounting
• Step 8: Close the books: Revenue, expense, and dividend accounts are zeroed out and balances are moved to retained earnings

Debits and Credits

• Debits increase asset, expense, and dividend accounts, while they decrease liability, equity, and revenue accounts.
• Credits increase liability, equity, and revenue accounts, while they decrease asset, expense, and dividend accounts.
• The normal balance of an account is the side (debit or credit) that increases the account.

Types of Accounting

• Financial accounting focuses on preparing financial statements for external users, such as investors and creditors.
• Managerial accounting provides information for internal users, such as managers, to make decisions.
• Tax accounting involves preparing tax returns and planning for tax obligations.
• Auditing involves examining financial statements to ensure they are fairly presented and comply with GAAP.
• Cost accounting involves determining the cost of products, processes, and activities.
• Government accounting relates to the finances of federal, agency and local governments and related non-profit entities

Accrual vs. Cash Accounting

• Accrual accounting recognizes revenue when earned and expenses when incurred, regardless of when cash changes hands.
• Cash accounting recognizes revenue when cash is received and expenses when cash is paid.
• GAAP requires accrual accounting for most businesses.

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 (permitted under GAAP, but not IFRS).
• Weighted-Average Cost calculates a weighted average cost of all units available for sale and uses that average to determine the cost of goods sold and ending inventory.

Depreciation Methods

• Straight-Line depreciation allocates the cost of an asset evenly over its useful life.
• Double-Declining Balance is an accelerated depreciation method that results in higher depreciation expense in the early years of an asset's life.
• Units of Production depreciation allocates the cost of an asset based on its actual use.

Ratio Analysis

• Ratio analysis involves calculating and interpreting financial ratios to assess a company's performance and financial health.
• Liquidity ratios measure a company's ability to meet its short-term obligations (e.g., current ratio, quick ratio).
• Solvency ratios measure a company's ability to meet its long-term obligations (e.g., debt-to-equity ratio).
• Profitability ratios measure a company's ability to generate profits (e.g., profit margin, return on equity).
• Efficiency ratios measure how efficiently a company is using its assets (e.g., inventory turnover, accounts receivable turnover).

Internal Controls

• Internal controls are policies and procedures designed to safeguard assets, ensure accurate and reliable accounting information, promote operational efficiency, and encourage adherence to policies.
• The Sarbanes-Oxley Act (SOX) requires public companies to establish and maintain effective internal controls.

Budgeting

• Budgeting is the process of creating a financial plan for the future.
• A master budget is a comprehensive budget that includes operating budgets and financial budgets.
• Operating budgets include sales, production, and expense budgets.
• Financial budgets include cash, capital expenditure, and balance sheet budgets.
• A flexible budget adjusts to changes in activity levels, providing a more accurate comparison to actual results.

Cost-Volume-Profit (CVP) Analysis

• CVP analysis examines the relationship between costs, volume, and profit.
• The break-even point is the level of sales at which total revenues equal total costs resulting in zero profit.
• The margin of safety is the difference between actual or expected sales and the break-even point.

Standard Costing

• Standard costing involves setting predetermined costs for materials, labor, and overhead.
• Variances are the differences between actual costs and standard costs.
• Variance analysis helps identify areas where costs are out of control.

Activity-Based Costing (ABC)

• ABC assigns costs to activities and then assigns costs to products or services based on their consumption of those activities.
• ABC provides a more accurate cost allocation than traditional costing methods.

Capital Budgeting

• Capital budgeting is the process of evaluating and selecting long-term investments.
• Common capital budgeting techniques include net present value (NPV), internal rate of return (IRR), and payback period.
• NPV calculates the present value of expected cash flows using a discount rate.
• IRR is the discount rate that makes the NPV of a project equal to zero.
• Payback period is the time it takes for a project to recover its initial investment.

Ethics in Accounting

• Accountants have a responsibility to act ethically and with integrity.
• Ethical codes, such as those established by the AICPA and IMA, provide guidance for accountants.
• Ethical dilemmas often involve conflicts of interest or situations where there is pressure to manipulate financial information.

International Financial Reporting Standards (IFRS)

• IFRS are a set of accounting standards issued by the International Accounting Standards Board (IASB).
• IFRS are used by many countries around the world.
• GAAP and IFRS differ in some areas, such as inventory valuation and revenue recognition.