Understanding Accountancy Basics

• Accountancy is the process of recording, classifying, summarizing, and interpreting financial transactions.
• It provides financial information to stakeholders for decision-making.
• Financial reporting is a specific branch of accountancy focused on preparing and presenting financial statements.
• These statements communicate a company's financial performance and position to external users.

Key Financial Statements

• The balance sheet presents a company's assets, liabilities, and equity at a specific point in time.
• Assets are a company’s resources, things it owns or is owed.
• Liabilities are obligations of the company to others.
• Equity represents the owners' stake in the company.
• The basic accounting equation is Assets = Liabilities + Equity.
• The income statement reports a company's financial performance over a period of time.
• It shows revenues, expenses, and the resulting net income or loss.
• Revenues are inflows from the company's primary business activities.
• Expenses are outflows or consumption of assets incurred to generate revenue.
• Net income is calculated as Revenues - Expenses.
• The statement of cash flows tracks the movement of cash both into and out of a company over a period of time.
• This shows where the cash came from, and how it was spent.
• It categorizes cash flows into operating, investing, and financing activities.
• Operating activities relate to the day-to-day business operations.
• Investing activities relate to the purchase and sale of long-term assets.
• Financing activities relate to how the company is funded (debt and equity).
• The statement of changes in equity reconciles the beginning and ending balances of equity accounts.
• It details changes in owner's equity.
• These changes can result from profits, owner investments, or dividends.

Generally Accepted Accounting Principles (GAAP)

• GAAP is a common set of accounting rules, procedures, and standards used in the United States.
• It is issued by standard-setting bodies like the Financial Accounting Standards Board (FASB).
• GAAP aims to make financial statements relevant, reliable, and comparable.
• International Financial Reporting Standards (IFRS) are used in many other countries around the world.
• IFRS are issued by the International Accounting Standards Board (IASB).

Key Accounting Principles

• The historical cost principle states that assets should be recorded at their original cost.
• The revenue recognition principle dictates when revenue should be recognized.
• Revenue is recognized when it is earned and realized or realizable.
• The matching principle requires that expenses be matched with the revenues they helped generate.
• The full disclosure principle requires companies to disclose all relevant information.
• This will ensure that financial statement users are able to make informed decisions.
• The going concern assumption assumes that a company will continue to operate in the foreseeable future.
• The monetary unit assumption assumes that transactions can be expressed in a stable monetary unit.
• The economic entity assumption assumes that the business is separate from its owners.

Accrual Accounting vs. Cash Accounting

• Accrual accounting recognizes revenues when earned and expenses when incurred.
• Cash accounting recognizes revenues when cash is received and expenses when cash is paid.
• GAAP requires accrual accounting because it provides a more accurate picture of financial performance.

Depreciation

• Depreciation is the process of allocating the cost of a tangible asset over its useful life.
• Common depreciation methods include straight-line, declining balance, and units of production.
• Straight line depreciation allocates the cost evenly.
• Declining balance applies a rate to the book value.
• Units of production depreciates based on actual usage.

Inventory Valuation

• Inventory is goods held for sale to customers.
• Common inventory valuation methods include FIFO, LIFO, and weighted-average.
• FIFO (first-in, first-out) assumes that the first units purchased are the first ones sold.
• LIFO (last-in, first-out) assumes that the last units purchased are the first ones sold. (prohibited under IFRS)
• Weighted-average calculates a weighted average cost for all units available for sale.

Financial Statement Analysis

• Financial statement analysis involves using financial statements to assess a company's performance and financial position.
• Ratio analysis is a common technique used in financial statement analysis.
• Profitability ratios measure a company's ability to generate profits.
• Liquidity ratios measure a company's ability to meet its short-term obligations.
• Solvency ratios measure a company's ability to meet its long-term obligations.
• Efficiency ratios measure how efficiently a company is using its assets.

Internal Controls

• Internal controls are policies and procedures designed to safeguard assets, ensure accurate accounting, and promote operational efficiency.
• Strong internal controls help to prevent and detect fraud and errors.

Auditing

• Auditing is an independent examination of a company's financial statements.
• The purpose of an audit is to provide assurance that the financial statements are fairly presented in accordance with GAAP or IFRS.
• An independent auditor expresses an opinion on the fairness of the financial statements.

Ethical Considerations

• Accountants have a responsibility to act ethically.
• They must be objective, honest, and maintain confidentiality.
• Professional codes of conduct guide ethical behavior in the accounting profession.

Taxation

• Taxation is a significant aspect of accountancy.
• Accountants must understand tax laws and regulations.
• They assist companies in tax planning and compliance.

Cost Accounting

• Cost accounting focuses on determining the cost of products or services.
• It's used for internal decision-making.
• Cost-volume-profit (CVP) analysis examines the relationship between costs, volume, and profit.

Budgeting

• Budgeting is the process of creating a financial plan for the future.
• A budget expresses the goals of the organization in monetary terms.
• Budgets are often used for performance evaluation.

Forensic Accounting

• Forensic accounting involves applying accounting principles to legal issues.
• Forensic accountants investigate fraud and other financial crimes.

Not-for-Profit Accounting

• Not-for-profit accounting has unique characteristics.
• The focus is on fund accounting.
• Ensure resources are used in accordance with donor restrictions.

Government Accounting

• Government accounting follows unique standards.
• This is often set by governmental bodies, such as the GASB in the US.
• This ensures accountability.

Current Trends in Accountancy

• Technology like AI & machine learning are impacting the field.
• Increasing use of data analytics in accounting.
• Growing importance of sustainability reporting.
• Increasing prevalence of data analytics.

Accounting Equation Details

• Assets represent what a company owns and include: cash, accounts receivable, inventory, equipment, and buildings
• Liabilities represent what a company owes to others and include: accounts payable, salaries payable, loans payable, and deferred revenue.
• Equity represents the owners' stake in the company and includes: common stock, retained earnings.

Revenue Recognition - Expanded

• This principle is key and has been codified in standards like ASC 606 and IFRS 15.
• Revenue is recognized when a company transfers goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services.
• A 5-step process often guides revenue recognition: Identify the contract, Identify the performance obligations, Determine the transaction price, Allocate the transaction price, Recognize revenue when (or as) each performance obligation is satisfied