Introduction to Accounting Principles

Definition

• Accounting is the systematic process of recording, measuring, and communicating financial information about economic entities.

Key Objectives

• Provide information useful for decision-making.
• Ensure accountability of financial resources.
• Comply with legal requirements and regulations.

Fundamental Concepts

1. Double-entry Accounting

   • Every transaction affects at least two accounts.
   • Maintains the accounting equation: Assets = Liabilities + Equity.

2. Accrual vs. Cash Basis Accounting

   • Accrual Basis: Revenues and expenses are recorded when they are earned or incurred, regardless of cash flow.
   • Cash Basis: Revenues and expenses are recorded only when cash is exchanged.

3. Financial Statements

   • Income Statement: Shows revenue, expenses, and profit over a period.
   • Balance Sheet: Snapshot of assets, liabilities, and equity at a specific date.
   • Cash Flow Statement: Tracks cash inflow and outflow from operations, investing, and financing activities.

4. Generally Accepted Accounting Principles (GAAP)

   • A framework of accounting standards, principles, and procedures used in financial reporting.

5. International Financial Reporting Standards (IFRS)

   • A set of accounting standards developed for global consistency in financial reporting.

Accounting Cycle

1. Identify Transactions
2. Record Journal Entries
3. Post to Ledger
4. Prepare Trial Balance
5. Prepare Financial Statements
6. Close the Books

Key Roles in Accounting

• Accountant: Prepares financial statements and ensures compliance with regulations.
• Auditor: Examines financial records for accuracy and adherence to standards.
• Controller: Manages accounting activities and reports to management.

Types of Accounting

• Financial Accounting: Focuses on external reporting.
• Managerial Accounting: Focuses on internal decision-making.
• Tax Accounting: Involves preparing tax returns and planning for tax obligations.
• Forensic Accounting: Investigates financial discrepancies and fraud.

Important Ratios

• Current Ratio: Measures liquidity (Current Assets / Current Liabilities).
• Debt to Equity Ratio: Assesses financial leverage (Total Liabilities / Total Equity).
• Return on Equity (ROE): Indicates profitability (Net Income / Shareholder's Equity).

Tools and Software

• Common accounting software includes QuickBooks, Xero, and Sage.
• Spreadsheet applications like Microsoft Excel are also widely used for financial analysis and reporting.

Ethical Standards

• Integrity, objectivity, professional competence, confidentiality, and professional behavior are key ethical principles in accounting.

Definition

• Accounting is the process of recording, measuring, and communicating financial information about entities.

Key Objectives

• Providing information for decision-making
• Demonstrating accountability for financial resources
• Ensuring compliance with legal requirements

Fundamental Concepts

• Double-entry Accounting
  • Every transaction affects at least two accounts
  • Maintains the equation Assets = Liabilities + Equity
• Accrual vs. Cash Basis Accounting
  • Accrual Basis: Revenues and expenses are recorded when earned or incurred, regardless of cash flow
  • Cash Basis: Revenues and expenses are recorded only when cash is exchanged
• Financial Statements
  • Income Statement: Shows revenues, expenses, and profit over a period
  • Balance Sheet: Displays a snapshot of assets, liabilities, and equity at a specific date
  • Cash Flow Statement: Tracks cash inflow and outflow from operations, investing, and financing activities
• Generally Accepted Accounting Principles (GAAP)
  • A framework of accounting standards, principles, and procedures used in financial reporting
• International Financial Reporting Standards (IFRS)
  • A set of accounting standards developed for global consistency in financial reporting

Accounting Cycle

• Identifying transactions
• Recording journal entries
• Posting to ledgers
• Preparing trial balances
• Preparing financial statements
• Closing the books

Key Roles in Accounting

• Accountant: Prepares financial statements and ensures compliance with regulations
• Auditor: Examines financial records for accuracy and adherence to standards
• Controller: Manages accounting activities and reports to management

Types of Accounting

• Financial Accounting: Focuses on external reporting
• Managerial Accounting: Focuses on internal decision-making
• Tax Accounting: Involves preparing tax returns and planning for tax obligations
• Forensic Accounting: Investigates financial discrepancies and fraud

Important Ratios

• Current Ratio: Measures liquidity (Current Assets / Current Liabilities)
• Debt to Equity Ratio: Assesses financial leverage (Total Liabilities / Total Equity)
• Return on Equity (ROE): Indicates profitability (Net Income / Shareholder's Equity)

Tools and Software

• Common accounting software includes QuickBooks, Xero, and Sage.
• Spreadsheet applications, such as Microsoft Excel, are widely used for financial analysis and reporting.

Ethical Standards

• Integrity, objectivity, professional competence, confidentiality, and professional behavior are key ethical principles in accounting.