This document provides an introduction to accounting, including definitions, purposes, and key concepts. It discusses how accounting is an information system that reports on economic activities and financial conditions of businesses. It also describes the various forms of business organization, types of business activities, users of accounting information, and key accounting terms like assets, liabilities, equity, financial statements, and the general ledger. The document is intended to give a broad overview of accounting fundamentals.
1. IntroductiontoAccounting
ACCOUNTING
• It isan informationsystemthatreportsonthe economicactivitiesandfinancial conditionof a
businessorotherorganization.
• There needstobe a systemorsetof rulessoyou are able to compare entitiestoeach other.
The language of business
• It will helpyousucceedinbusiness
• It isthe meansthatbusinessinformationiscommunicatedtothe stakeholdersinthe business
AccountingandYou
• Helpyouprepare a budgetand keepontarget.
• Realize howmuchcashyou have and if there isenoughtopay bills.
• Uncoverplaceswhere costscan be cut.
AccountingandBusiness
• Vital tool inmakingbusinessdecisions
• Keepstrackof the economicperformance,resourcesandreportsthe financial positionof the
business
AccountingandGovernment
• for successful implementationof governmentrevenue andcollectionsystem
• The law upliftsthe professionandexpandsitscoverage fromthe qualificationof the accounting
teacher
• The law givestootto the professionandsuggestsitsimportance tothe industrial world.
FORMS OF BUSINESS ORGANIZATION
Sole/SingleProprietorship. The ownershipof the businessenterprise isonlyone.
Partnership. The ownershipof the businessenterprise rangesfromtwotomore persons.
Two kindsof partnership: general
partnershipandgeneral professional
partnership
Corporation. The ownershipof the businessenterpriserangesfromfive tomore persons.
TYPES OF BUSINESS ACTIVITIES
Service Concern. Businessorganizationthatrenders servicestotheircustomerstoearnincome.
2. Trading Concern or Merchandising Concern. Businessorganizationusuallybuys merchandise andsells
to theircustomers.
Manufacturing Concern. Businessorganizationusuallybuysraw materialsandconvertsthem into
finishedproductsandare soldinthe market.
USER OF THE ACCOUNTING INFORMATION
• Managementor internal users – accountinghelpsintheirdecisionmaking
• Investors– concernwiththeirreturnof investment(ROI)
• Lenders– givesinformationof the financial capacityandthe abilityof the borrower
• Suppliers– determine the creditworthof the customer
• Government– tax,verifiesif the businessiscomplyingwithitspromulgatedrulesand
regulations.
• Employees– demandsbetterwages,benefits,andsecurityof tenure
• Customers
• Trade associations, stock exchanges,studentsand others
ACCOUNTING INFORMATIONSYSTEM - Is a processof creating reports after gatheringand processing
data where meaningful interpretationofmanagementmay lead them to rendereconomicdecisions.
Statement of financial condition. Knownasbalance sheet,one of the financial statements,carries
informationaboutthe financialconditionof the business.
Net worth. Representsthe owner’sshare inthe assetsof the business.
Statement of ChangesinOwner’s Equity. Changesinthe capital account and the owner’sside of the
equation.
• Closingentries mean that all nominal and temporary accounts will be closedto capital account
so that the remainingaccounts will be the permanentor the real accounts.
• Posting-closingtrial balance isessential to balance the accounts so that before the start of
another accounting periodthe accounts are already balance.
• Before we formallyopenthe books for the firsttransactions to recordedin, we still have one
optional process and that is the preparation of reversal entries.
• We are now ready to start another process followingthe same process.
Financial accounting
• Branch of accountingassociatedwithpreparingreportsforexternal users
Managerial accounting
• Accountingguidesmanagementinmakingdecisionsaboutthe business
3. Objectivesof financial accounting
• To reportthe financial conditionof abusinessata pointintime.
• To reportchangesin the financial condition of abusinessoveraperiodof time.
• First,recordthe economiceventsaffectingabusiness.
• Second,summarize the impactof these eventsinareportcalledfinancial statements.
• GenerallyAcceptedAccountingPrinciples(GAAP)
Who’swhoin accounting
• Bookkeepers-recordeachtransaction
• Accountants-preparefinancial statements
• Auditors-review the company’sbooksandlookforerrorsand discrepancies(couldbe internalor
external)
• Controller-incharge of the accountingdepartment
• CPAs-certifiedpublicaccountants
• Typicallyworkforan accountingfirmcalledpublicaccounting
• Once a yearcome in anddo an auditof the booksof the companyand dothe relatedtax returns
• CPAsalsoworkfor private companies
Four financial statements
• Balance sheet
• Income statement(profit/loss)
• Statementof cashflows
• Statementof changesinequity
Elementsof financial statements
• The informationinthe financial statementsisorganizedinto10categoriescalledelements.
• The elementsinclude: assets,liabilities,equity, contributedcapital,revenue,expenses,
distributions,netincome,gainsandlosses.
• The elementsare dividedintoclassificationscalledaccounts.
• For instance there are differentkindsof assets. A businesswouldhave acashaccount like a
checkingaccountand theymightalsoowna building.
General ledger
• Thinkof it like abook thatkeepstrack of all the accounts
4. • It isa chronological recordof all the businesstransactions
• Sometimesitiscalledthe company’sbooks
• Everythinginthe general ledger flowstothe financialstatements
Assets
• Assetsare thingsyouownor resourcesabusinessowns.
• The assetsof a businessbelongtoitscreditorsandinvestors.
• Tangible assets-thisyoucantouchlike machinery,buildings,land,computers,etc.
• Intangible assets-thingsyoucannottouchsuchas rightto patents,rightsto paymentsfrom
customers,copyrightsortrademarks.
Examplesof Assets
• Cash
• PettyCash
• TemporaryInvestments
• AccountsReceivable
• Inventory
• Supplies
• PrepaidInsurance
• Land
• Land Improvements
• Buildings
• Equipment
• Goodwill
• Contra assetsare assetaccounts with credit balances.
• Examplesof ContraAssetAccounts
• Allowance forDoubtful Account
• AccumulatedDepreciation-LandImprovements
• AccumulatedDepreciation-Buildings
• Accumulated Depreciation-Equipment
• AccumulatedDepletion