Introduction to Accounting

Study Notes

Introduction to Accounting

Accounting is a systematic process of identifying, recording, and communicating financial information.
It provides quantitative information, usually expressed in monetary terms, about economic entities.
Key users of accounting information include investors, creditors, managers, and government agencies.
Accounting plays a vital role in decision-making, financial reporting, and regulatory compliance.
It facilitates communication between stakeholders and managers, providing insight into business performance and financial health.

Financial Accounting

Financial accounting focuses on providing information to external users, such as investors and creditors.
This information is used to make investment and lending decisions.
Financial reports are prepared according to generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).
These standards ensure comparability and consistency in financial reporting across entities.
Financial statements are the primary output of financial accounting.

Key Financial Statements

Balance Sheet: A snapshot of a company's assets, liabilities, and equity at a specific point in time. It follows the fundamental accounting equation: Assets = Liabilities + Equity.
- Assets are resources owned and controlled by the company.
- Liabilities represent the company's obligations to others.
- Equity represents the owners' residual interest in the company's assets after deducting liabilities.
Income Statement: Reports a company's financial performance over a period of time. It summarizes revenues and expenses to arrive at net income or net loss.
- Revenues are inflows of economic resources resulting from the ordinary activities of a business during a specific period.
- Expenses are outflows of economic resources incurred in the process of generating revenue during a specific period.
Statement of Cash Flows: Shows the movement of cash and cash equivalents into and out of a company over a period of time. It's divided into three activities: operating, investing, and financing.
- Operating activities relate to cash flows from the normal business activities.
- Investing activities concern the purchase and sale of long-term assets.
- Financing activities include cash flows from debt, equity, and dividends.
Statement of Changes in Equity: Shows the changes in equity over a period of time. It details factors that impact equity, like profits, dividends, and changes in capital.

Accounting Principles and Concepts

Accrual Accounting: Records revenues when earned and expenses when incurred, regardless of when cash is received or paid. This provides a more accurate picture of a company's performance.
Matching Principle: Expenses are matched with revenues in the period in which they are incurred to generate those revenues.
Conservatism Principle: When there are two equally likely outcomes, the more conservative (less optimistic) one should be chosen. Avoid overstating assets and revenues, while acknowledging potential losses early.
Full Disclosure Principle: Financial statements should disclose all relevant information that could reasonably influence decisions made by users.
Materiality Principle: If an item is insignificant, it doesn't need to be disclosed separately. A company doesn't need to disclose a small expense, for example.
Going Concern Principle: Assumes that the business will continue to operate for the foreseeable future. This allows for long-term assets to be valued at their historical cost or fair value, not assumed to be immediately sold.

Accounting Equation

Assets = Liabilities + Equity
This fundamental accounting equation must always balance to show that every asset is either financed by a liability (debt) or ownership (equity).

Description

This quiz covers the fundamental concepts of accounting, focusing on its systematic process of identifying, recording, and communicating financial information. It highlights the importance of accounting for various users including investors, creditors, and managers, and explains key concepts in financial accounting under GAAP and IFRS standards.