Lecture 1
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Accounting is “the language of business.”
More precisely, accounting is a system of
maintaining
records
of
a
company’s
operations
and
communicating
that
information to decision makers
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Financial Accounting – refers to information
describing the financial resources, obligations
and activities of an economic entity used by
external parties for decision making
Management Accounting - deals with the
methods accountants use to provide
information to an organization’s internal
users—that is, its own managers
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Tax Accounting
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Used by an Organization to:
◦ Develop accounting information
◦ Communicate this information to decision makers
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Important factors that affect the structure
are:
◦ The company’s needs for accounting information
◦ The resources available for operation of the system
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Interpret and record the effects of business
transactions
Classify the similar transactions in a manner
that permits determination of the various
totals and subtotals useful to management
and used in accounting reports
Summarize and communicate the information
contained in the system to decision makers
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Investors make decisions related to buying
and selling the company’s stock (shares of
ownership): Is the company profitable?
Creditors make decisions related to lending
money to the company: Will the company be
able to repay its debt when it comes due? Will
it be able to pay interest in the meantime?
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Owners
Labor Unions
Governmental Agencies
Suppliers
Customers
Trade Associations
General Public
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Management is the design and use of accounting
information to achieve the organization’s objectives
by supporting decision makers inside the enterprise
Management accounting systems assign decisionmaking authority over the enterprise’s resources to
its employees
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Management accounting systems provide a wealth of
information for supporting decision-making activity
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The system is also used to evaluate and reward
decision making performance
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Board of Directors
Chief Executive Officer (CEO)
Chief Financial Officer (CFO)
Vice-presidents
Business Unit Managers
Plant Managers
Store Managers
Line Supervisors
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Financing activities are transactions involving external sources of
funding - There are two basic sources of this external funding—the
owners of the company who invest their own funds in the business, and
creditors who lend money to the company. With this financing, the
company engages in investing activities.
Investing activities include the purchase and sale of
◦ long-term resources such as land, buildings, equipment, and
machinery and
◦ any resources not directly related to a company’s normal operations.
Once these investments are in place, the company has the resources
needed to run the business and can perform operating activities.
Operating activities include transactions that relate to the primary
operations of the company, such as providing products and services to
customers and the associated costs of doing so, like utilities, taxes,
advertising, wages, rent, and maintenance.
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We measure resources owned by a company
as assets
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Amounts owed to creditors are liabilities
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The ownership on the business is the owner’s
equity – it reflects total worth of business
◦ Owner’s Equity is simply Assets-Liabilities
◦ Stockholder’s Equity is Common stock + Retained
Earnings where Retained Earnings is calculated :
Retained Earnings = Net income - Dividends
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The accounting equation illustrates
fundamental model of business valuation
Assets = Liabilities + Owner’s Equity
Increase in an asset = Decrease in another asset
Increase in an asset = Increase in a liability
Decease in an asset = Decrease in a liability
Decrease in an asset = Decrease in equity
Decrease in an asset = Increase in another asset
a
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Revenues are the amounts earned from selling
products or services to customers
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Expenses are the costs of providing products and
services
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A dividend is a payment made by a corporation
to its shareholders, usually as a distribution of
profit/ Net Income
We measure the difference between revenues and
expenses as net income
Net Income = Revenue - Expenses
Match the term with the appropriate definition.
1. Assets
A. Costs of selling products or services.
2. Liabilities
B. Amounts earned from sales of
3. Stockholders’ equity
products or services.
4. Dividends
C . Amounts owed.
5. Revenues
D. Distributions to stockholders.
6. Expenses
E . Owners’ claims to resources.
F. Resources owned.
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Sole Proprietorship
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Partnership
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Corporation
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An unincorporated business owned by one person
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Not a separate legal entity
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Personal liability for business debts – Unlimited
liability
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Income taxable to owner
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The owner has the managerial authority
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Entity ceases with retirement or death of owner
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An unincorporated business owned by two or more
partners
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Not a separate legal entity
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Personal liability for partnership debts
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Income taxable to partners
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Every partner has the managerial authority
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New partnership is formed with a change in partners
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Legal entity having an existence separate and distinct from that
of its owners
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The owners of a corporation are called stockholders (or
shareholders)
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Ownership is evidenced by transferable shares of capital stock
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No personal liability for corporate debts
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Files a corporate tax return and pays income taxes on its
earnings
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Managed by hired professional managers
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Indefinite existence
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Financial statements are periodic reports
published by the company for the purpose of
providing information to external users
Four primary financial statements:
1.
2.
3.
4.
Income statement
Statement of stockholders’ equity
Balance sheet
Statement of cash flows
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A financial statement that reports the
company’s revenues and expenses over an
interval of time
Revenues − Expenses = Net income
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If expenses exceed revenues,
company reports a net loss.
then
the
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Presents the financial position of the
company on a particular date
Assets = Liabilities +Owner’s Equity/Stockholders’ Equity
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Measures activities involving cash receipts and cash
payments over an interval of time
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There are three fundamental business activities
◦ Operating cash flows include cash receipts and cash
payments for transactions involving revenues and expenses
◦ Investing cash flows generally include cash transactions for
the purchase and sale of investments and productive longterm assets. Long-term assets are resources owned by a
company that are thought to provide benefits for more than
one year
◦ Financing cash flows include cash transactions with lenders,
such as borrowing money and repaying debt, and with
stockholders, such as issuing stock and paying dividends