2. Accounting Basics
Financial Accounting Basics
Financial Accounting
Accounting Equation
Expanded Accounting Equation
Account Format
Chart of Accounts
Asset Accounts
Liability Accounts
Equity Accounts
Contra Account
Revenue Accounts
Expense Account
General Ledger
Debits and Credits
Double Entry Accounting
Business Events
General Journal
Trial Balance
3. Financial Accounting Basics
The field of accounting is often thought of as a set of
complex business rules and endless numbers.
Accounting, at its heart, is actually a set of very
simple concepts and principles
4. What is Financial Accounting?
Accounting in general deals with identifying business
activities, like sales to customers, recording these activities,
like journalizing, and communicating these activities with
people outside the organization with financial statement
Financial accounting, however, is a subsection of the general
field of accounting that focuses on gathering and compiling
data in order to present it to external users in a usable form
Basically, financial accounting’s main purpose is to provide
useful, financial information to people or groups outside of
companies often called external users.
5. Who Uses Financial Accounting?
The ultimate goal of financial accounting is to compile
business transactions and other input documents like invoices
and sales receipts in the form of general purpose financial
statements that can be understood by external users.
6. Different Types of Financial Statement Users
Financial accounting aims as providing financial information that is reliable,
relevant, and comparable to these external users.
Shareholders or Investors
Lenders or Creditors
Customers
Suppliers
Regulators
Unions
Brokers and Analysts
Press
7. Shareholders or Investors
Shareholders and other investors are usually the first group of external users
that comes to mind.
Investors in general want to assess the value of a company in order to decide
whether it is worth buying, selling, or holding their stock.
Investors read financial statements to help predict future performance and
company worth.
8. Lenders or Creditors
Lenders or creditors also use financial statements to base the decisions on
because they want to know if a company is creditworthy enough to pay off
its current loans or borrow additional funds.
Creditors study financial statements in order to analyze the liquidity and
sustainability of a company.
9. Customers
It might sound unlikely, but many customers study financial
statements before making major purchases.
For instance, large companies like GM will study financial
statements of their potential suppliers in order to make sure
they are fiscally sound.
A company, like GM, benefits from long-term relationships
with its suppliers. It wants to make sure of potential suppliers’
longevity before it goes into business with them.
10. Suppliers
Suppliers also use the financial statements of customers to
judge whether they are creditworthy enough to extend credit.
For example, if a customer orders 100,000 units from a
supplier, the supplier wants to know whether the customer
will be able to pay for these units before the supplies incurs
the expense of producing them.
11. Regulators
Regulators like the SEC, PCAOB, and IRS use company
financial statements to make sure the companies are
following applicable laws.
The SEC and PCAOB monitor publicly traded companies to
reduce fraudulent business activities; whereas, the IRS is
mainly focused on tax collection and compliance
12. Unions
Labour unions use financial information to judge whether
employee wage rates and benefit packages are fair,
They also use this information to assess future job prospects
and bargain for higher wages and better benefits
13. Brokers and Analysts
Brokers and analysts are often potential investors that use
financial information about companies to chart performance
trends and growth rates.
These external users create reports that influence current
investors opinions and actions.
14. Press
Although the press doesn’t use financial information for its
decision bases, it does report on the financial information of
companies.
Networks like Yahoo Finance and MSN Money are multi-
million dollar businesses that simply report financial
information about other companies.
