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Financial Accountings The Language of Business
Introduction Accounting - a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements Financial accounting - focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies
Financial and Management AccountingAccountants answer these primary questions with three major financial statements. Balance Sheet - financial picture on a given day Income Statement - performance over a given period Statement of Cash Flows - performance over a given period
The Balance SheetSections of the balance sheet: Assets - resources of the firm that are expected to increase or cause future cash flows (everything the firm owns) Liabilities - obligations of the firm to outsiders or claims against its assets by outsiders (debts of the firm) Owners’ Equity - the residual interest in, or remaining claims against, the firm’s assets after deducting liabilities (rights of the owners)
The Balance SheetThe balance sheet equation:Assets = Liabilities + Owners’ Equity orOwners’ Equity = Assets - Liabilities
The Balance Sheet HAMILTON COMPANY Balance Sheet December 31, 1997 Assets LiabilitiesCurrent assets: Current liabilities: Cash $ 4,525 Accounts payable $ 9,800 Accounts receivable 2,040 Wages payable 3,765 Total current assets $ 6,565 Total liabilities $13,565Plant assets: Land $ 9,755 Equipment 6,500 Owners’ Equity Total plant assets 16,255 Hamilton, capital 9,255 Total liabilities and Total assets $22,820 Owners’ equity $22,820 ============= =============
Types of OwnershipManagement by the owners: Sole proprietorship - The owner is an active manager in day-to-day operation of the business. Partnership - Partners are usually active managers in day-to-day operations of the business. Corporation - Shareholders usually do not participate in the day-to-day operations of the business.