Introduction to Accounting

• Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions.
• It provides financial information to assist users in making informed decisions.

Core Functions

• Recording: The initial step involving the systematic documentation of financial transactions.
• Classifying: Grouping similar transactions together for easy summarization.
• Summarizing: Compiling classified data into financial statements.
• Interpreting: Analyzing financial information to derive meaningful insights.

Users of Accounting Information

• Internal users: Managers, employees, and owners who use accounting information for decision-making within the organization.
• External users: Investors, creditors, customers, and regulatory agencies who use accounting information to assess the organization's performance.

Types of Accounting

• Financial accounting: Focuses on preparing financial statements for external users, adhering to GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards).
• Managerial accounting: Provides information to internal users for decision-making, planning, and control.
• Tax accounting: Deals with the preparation of tax returns and tax planning.
• Cost accounting: Focuses on determining the cost of products or services.
• Auditing: Involves the independent examination of financial statements to ensure their fairness and reliability.

Key Financial Statements

• Income statement: Reports a company's financial performance over a period of time, showing revenues, expenses, and net income.
• Balance sheet: Presents a company's assets, liabilities, and equity at a specific point in time, following the accounting equation (Assets = Liabilities + Equity).
• Statement of cash flows: Summarizes the movement of cash both into and out of a company over a period of time, categorized into operating, investing, and financing activities.
• Statement of retained earnings: Details changes in retained earnings during a period.

Basic Accounting Equation

• Assets = Liabilities + Equity
• Assets: Resources owned by a company.
• Liabilities: Obligations of a company to external parties.
• Equity: The owners' stake in the company.

Generally Accepted Accounting Principles (GAAP)

• GAAP is a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB).
• It aims to ensure financial statements are relevant, reliable, and comparable.
• Following GAAP is crucial for consistency and transparency in financial reporting.

Key Accounting Principles

• Revenue recognition principle: Revenue is recognized when it is earned and realized or realizable.
• Matching principle: Expenses are recognized in the same period as the revenues they helped generate.
• Historical cost principle: Assets are recorded at their original cost.
• Full disclosure principle: All relevant information that could affect users' decisions should be disclosed in the financial statements.
• Going concern assumption: Assumes that the business will continue to operate in the foreseeable future.
• Monetary unit assumption: Accounting information is measured and reported in a stable monetary unit.
• Economic entity assumption: The business is separate and distinct from its owners.
• Time period assumption: The life of a business can be divided into artificial time periods for reporting purposes.

The Accounting Cycle

• The accounting cycle is a series of steps businesses use to record and summarize accounting data for a specific period.
• It starts with recording transactions and ends with preparing financial statements.

Steps in the Accounting Cycle

• Identifying and analyzing transactions: Determining which activities constitute recordable transactions.
• Journalizing: Recording transactions in the general journal.
• Posting: Transferring journal entries to the general ledger. Example: moving debits and credits from journal to ledger accounts.
• Preparing an unadjusted trial balance: Listing all general ledger accounts and their balances.
• Making adjusting entries: Recording accruals, deferrals, and estimations at the end of the period.
• Preparing an adjusted trial balance: Listing all general ledger accounts and their balances after adjustments.
• Preparing financial statements: Creating the income statement, balance sheet, statement of cash flows, and statement of retained earnings.
• Closing entries: Transferring temporary account balances to retained earnings.
• Preparing a post-closing trial balance: Listing all permanent account balances after closing entries.

Debits and Credits

• Debit (Dr): Increases asset, expense, and dividend accounts; decreases liability, equity, and revenue accounts.
• Credit (Cr): Increases liability, equity, and revenue accounts; decreases asset, expense, and dividend accounts.
• The basic accounting equation must always balance, meaning total debits must equal total credits in every transaction.

Accrual Accounting 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.

Adjusting Entries

• Adjusting entries are made at the end of an accounting period to update certain accounts.
• Common types include accruals, deferrals, and depreciation.
• Accrued revenues: Revenues earned but not yet received in cash.
• Accrued expenses: Expenses incurred but not yet paid in cash.
• Deferred revenues: Cash received but not yet earned.
• Deferred expenses: Cash paid but not yet used or expensed.
• Depreciation: Allocation of the cost of an asset over its useful life.

Inventory Valuation Methods

• FIFO (First-In, First-Out): Assumes the first units purchased are the first ones sold.
• LIFO (Last-In, First-Out): Assumes the last units purchased are the first ones sold.
• Weighted-average: Calculates a weighted-average cost based on the total cost of goods available for sale divided by the total units available for sale.

Ratio Analysis

• Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability.
• Liquidity ratios: Measure a company's ability to meet its short-term obligations.
• Profitability ratios: Measure a company's ability to generate earnings relative to its revenue, assets, and equity. Examples: profit margin, return on assets, and return on equity.
• Solvency ratios: Measure a company's ability to meet its long-term obligations.

Internal Controls

• Internal controls are processes implemented to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.
• Key components include the control environment, risk assessment, control activities, information and communication, and monitoring activities.
• Examples: Separation of duties, authorization procedures, and physical controls over assets.

Depreciation Methods

• Straight-line: Allocates an equal amount of depreciation expense each year.
• Double-declining balance: An accelerated method that depreciates an asset at twice the straight-line rate.
• Units of production: Allocates depreciation based on the actual usage or output of the asset.

Cost of Goods Sold (COGS)

• COGS represents the direct costs of producing goods or services sold by a company.
• Calculated as: Beginning Inventory + Purchases - Ending Inventory.

Budgeting

• Budgeting is the process of creating a financial plan for the future.
• Budgets can be static (fixed) or flexible (adjusted for actual activity levels).
• Master budget: A comprehensive set of budgets that covers all aspects of a company's operations.
• Operating budget: Focuses on the income-generating activities of a company.
• Financial budget: Focuses on the financial resources needed to support operations.

Capital Budgeting

• Capital budgeting is the process of evaluating and selecting long-term investments.
• Techniques include: Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period.

Ethical Considerations

• Ethical behavior is crucial in accounting to maintain trust and credibility.
• Accountants must adhere to codes of ethics and professional standards.

Accounting involves recording, classifying, summarizing, and interpreting financial transactions to provide valuable financial insights. It serves both internal users like managers and external users such as creditors. Financial accounting focuses on preparing statements for external users, while management accounting aids internal decision-making.