Introduction to Accounting

• Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of an organization.
• It provides insights into a company's financial performance, position, and cash flows.
• Accounting information is used by various stakeholders including investors, creditors, management, and regulators to make informed decisions.

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).
• Key financial statements include the balance sheet, income statement, statement of cash flows, and statement of changes in equity.
• Managerial accounting involves providing information to internal users (management) for decision-making, planning, and controlling operations.
• Techniques include cost accounting, budgeting, variance analysis, and performance evaluation.
• Tax accounting deals with preparing tax returns and complying with tax regulations.
• It involves understanding tax laws and regulations to minimize tax liabilities.
• Government accounting focuses on accounting for public sector entities, adhering to specific government accounting standards.
• It emphasizes accountability and transparency in the use of public funds.
• Forensic accounting involves investigating financial fraud and irregularities.
• Forensic accountants may work with law enforcement agencies or as consultants in legal disputes.

Core Accounting Principles

• The accrual principle states that revenue is recognized when earned and expenses are recognized when incurred, regardless of when cash changes hands.
• The matching principle dictates that expenses should be recognized in the same period as the revenue they helped generate.
• 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 and recorded in a stable monetary unit.
• The economic entity assumption assumes that the financial activities of a business are separate from those of its owners.
• The cost principle requires assets to be recorded at their original cost.
• The revenue recognition principle determines when revenue should be recognized.
• Usually when goods are transferred or services are performed.
• The full disclosure principle requires companies to disclose all relevant information that may affect users' decisions.

The Accounting Equation

• The fundamental accounting equation is Assets = Liabilities + Equity.
• This equation represents the balance between a company's resources (assets) and the claims against those resources (liabilities and equity).
• Assets are a company's resources, such as cash, accounts receivable, inventory, and equipment.
• Liabilities are a company's obligations to others, such as accounts payable, salaries payable, and loans payable.
• Equity represents the owners' stake in the company, which includes contributed capital and retained earnings.

The Accounting Cycle

• The accounting cycle is a series of steps that companies use to record and report financial transactions.
• Identify transactions: Analyze source documents, such as invoices, receipts, and bank statements, to identify business transactions.
• Journalize transactions: Record each transaction in the general journal, using debits and credits to maintain the accounting equation.
• Post to the ledger: Transfer journal entries to the general ledger, which maintains a separate account for each asset, liability, equity, revenue, and expense.
• Prepare a trial balance: Create a trial balance to ensure debits equal credits, verifying the mathematical accuracy of the ledger.
• Adjusting entries: Make adjusting entries to account for accruals, deferrals, and estimations.
• Adjusted trial balance: Prepare an adjusted trial balance after posting adjusting entries.
• Financial statements: Prepare financial statements, including the income statement, balance sheet, statement of cash flows, and statement of changes in equity.
• Closing entries: Close temporary accounts (revenue, expenses, and dividends) to retained earnings.
• Post-closing trial balance: Prepare a post-closing trial balance to verify that debits equal credits after closing entries.

Financial Statements

• The income statement reports a company's financial performance over a period of time, showing revenues, expenses, and net income or net loss.
• Revenues are inflows from delivering goods or services.
• Expenses are outflows or the using up of assets in generating revenue.
• Net income is the difference between revenues and expenses.
• The balance sheet presents a company's financial position at a specific point in time, showing assets, liabilities, and equity.
• Assets are classified as current (expected to be converted to cash within one year) or non-current (long-term assets).
• Liabilities are classified as current (due within one year) or non-current (long-term liabilities).
• Equity represents the owners' stake in the company.
• The statement of cash flows reports a company's cash inflows and outflows during a period of time, classified into operating, investing, and financing activities.
• Operating activities relate to the normal day-to-day activities of the business.
• Investing activities involve the purchase and sale of long-term assets.
• Financing activities include borrowing and repaying debt, issuing and repurchasing stock, and paying dividends.
• The statement of changes in equity reconciles the beginning and ending balances of equity accounts, such as contributed capital and retained earnings.

Cost Accounting

• Cost accounting is a branch of managerial accounting that focuses on measuring, analyzing, and reporting costs.
• Job order costing is used when products or services are unique and costs are tracked for each individual job.
• Process costing is used when products are similar and costs are averaged over the total production volume.
• Activity-based costing (ABC) assigns costs to activities and then assigns costs to products or services based on their consumption of activities.
• Cost-volume-profit (CVP) analysis examines the relationship between costs, volume, and profit to help managers make decisions about pricing, production, and sales.
• Standard costing involves setting predetermined standards for costs and then comparing actual costs to these standards to identify variances.

Budgeting

• Budgeting is the process of creating a financial plan for the future.
• Operating budgets focus on the day-to-day operations of a business, including sales, production, and expenses.
• Financial budgets focus on the financial resources of a business, including cash, capital expenditures, and financing.
• A master budget is a comprehensive budget that includes all of the individual budgets for a business.
• Budgetary control involves comparing actual results to the budget and taking corrective action when necessary.

Financial Statement Analysis

• Financial statement analysis involves using financial statements to evaluate a company's performance, position, and cash flows.
• Ratio analysis involves calculating and interpreting financial ratios to assess a company's liquidity, profitability, solvency, and efficiency.
• Liquidity ratios measure a company's ability to meet its short-term obligations.
• Profitability ratios measure a company's ability to generate profits.
• Solvency ratios measure a company's ability to meet its long-term obligations.
• Efficiency ratios measure how efficiently a company is using its assets.
• Trend analysis involves comparing financial data over time to identify trends and patterns.
• Common-size analysis involves expressing financial statement items as a percentage of a base amount to facilitate comparisons.

Auditing

• Auditing is the process of examining a company's financial statements to ensure that they are presented fairly in accordance with GAAP or IFRS.
• Internal audits are conducted by employees of the company to assess internal controls and improve operational efficiency.
• External audits are conducted by independent auditors who are not employees of the company.
• An unqualified opinion is issued when the auditor believes that the financial statements are presented fairly in all material respects.
• A qualified opinion is issued when the auditor has reservations about the fairness of the financial statements but does not believe that the misstatements are pervasive.
• An adverse opinion is issued when the auditor believes that the financial statements are not presented fairly.
• A disclaimer of opinion is issued when the auditor is unable to form an opinion on the fairness of the financial statements.

Accounting involves recording, summarizing, and reporting financial transactions. It offers insights into a company's performance and cash flow. Different types include financial, managerial, and tax, each serving specific user groups and purposes.