Key Concepts of Accounting

Definition of Accounting:
- Systematic process of recording, measuring, and communicating financial information.
Purpose of Accounting:
- To provide information for decision-making.
- To ensure compliance with laws and regulations.
- To assess the financial health of an organization.

Financial Accounting:
- Focuses on external reporting.
- Produces financial statements (balance sheet, income statement, cash flow statement).
- Adheres to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
Managerial Accounting:
- Focuses on internal reporting for management use.
- Includes budgeting, performance evaluation, and cost management.
Tax Accounting:
- Involves preparing tax returns and tax planning.
- Governed by tax laws and regulations.
Auditing:
- Independent examination of financial statements.
- Ensures accuracy and compliance with standards.

Accrual Principle:
- Revenues and expenses are recorded when they are earned or incurred, not necessarily when cash is received or paid.
Consistency Principle:
- Accounting methods should be applied consistently across periods for comparability.
Going Concern Principle:
- Assumes that an entity will continue to operate indefinitely.
Matching Principle:
- Expenses should be matched with revenues in the period they help to generate.
Cost Principle:
- Assets are recorded at their original purchase cost.

Balance Sheet:
- Snapshot of an organization's financial position at a specific time.
- Lists assets, liabilities, and equity.
Income Statement:
- Shows the company’s revenue and expenses over a period.
- Provides information on profitability.
Cash Flow Statement:
- Reports cash inflows and outflows from operating, investing, and financing activities.

Assets = Liabilities + Equity:
- Fundamental equation representing the relationship between what a company owns and owes.

Assets: Resources owned by a business.
Liabilities: Obligations owed to outsiders.
Equity: Owner's residual interest in the assets of the business after deducting liabilities.

Accounting is a systematic method for recording, measuring, and communicating financial data.
Aims to provide crucial information for decision-making, community compliance, and evaluating an organization’s financial health.

Financial Accounting:
- Concentrates on external reporting and produces key financial documents: balance sheet, income statement, and cash flow statement.
- Complies with GAAP or IFRS standards.
Managerial Accounting:
- Targets internal reporting for management purposes, covering budgeting, performance assessments, and cost management strategies.
Tax Accounting:
- Focuses on preparing tax returns and strategic tax planning according to relevant tax laws.
Auditing:
- Involves independent reviews of financial statements to confirm accuracy and adherence to established accounting standards.

Accrual Principle:
- Records revenues and expenses based on earning and incurring, independent of cash transactions.
Consistency Principle:
- Maintains uniform accounting methods across reporting periods to ensure comparability of financial data.
Going Concern Principle:
- Assumes that a business will continue operating for the foreseeable future.
Matching Principle:
- Aligns expenses with revenues within the period they generate them.
Cost Principle:
- Requires assets to be recorded at their original purchase price upon acquisition.

Balance Sheet:
- Provides a snapshot of an organization's financial position, detailing assets, liabilities, and equity at a specific point in time.
Income Statement:
- Reflects the organization's revenues and expenses over a given timeframe, offering insight into profitability.
Cash Flow Statement:
- Tracks cash inflows and outflows across operating, investing, and financing activities, highlighting liquidity.

Assets = Liabilities + Equity:
- Fundamental principle illustrating the relationship between what a company owns (assets) and what it owes (liabilities), along with the owner’s remaining interest (equity).

Assets:
- Resources that a business owns and controls, contributing to its value.
Liabilities:
- Responsibilities or obligations that the business owes to external parties.
Equity:
- Representation of the owners' interest in the assets of the business after liabilities are deducted.