Introduction To Accounting

Introduction to accounting
Accounting
 It is an information system that reports on
the economic activities and financial
condition of a business or other
organization.
 There needs to be a system or set of rules

so you are able to compare entities to each
other.
The language of business
 It will help you succeed in business
 It is the means that business information is

communicated to the stakeholders in the
business
Stakeholders
 Stakeholders are individuals and
organizations that need information about a
business.
 They include lenders, government agencies,
employees, news reporters and others.
How accounting can help you
 Help you prepare a budget and keep on
target.
 Realize how much cash you have and if

there is enough to pay bills.
 Uncover places where costs can be cut.

Financial accounting
 Branch of accounting associated with
preparing reports for external users
 i.e. the bank, shareholders

Managerial accounting
 Accounting to guide management in making
decisions about the business
 i.e. break even analysis

Taxation
 Intended to determine proper amount of
taxes to be remitted to the government
 i.e. Income Tax, Value Added Tax, etc.

Objectives of financial accounting
 To report the financial condition of a
business at a point in time.
 To report changes in the financial condition

of a business over a period of time.
Objectives continued
 First, record the economic events affecting a
business.
 Second, summarize the impact of these

events in a report called financial
statements.
 International Accounting Standards (IAS);

Generally Accepted Accounting Principles
(GAAP)
Who’s who in accounting
 Bookkeepers-record each transaction
 Accountants-prepare financial statements
 Auditors-review the company’s books and look for

errors and discrepancies (could be internal or
external)
 Controller-in charge of the accounting department

Who’s who in accounting
 CPAs-certified public accountants
 Typically work for an accounting firm called public

accounting
 Once a year come in and do an audit of the books

of the company and do the related tax returns
 CPAs also work for private companies

Financial Statements
 Statement of Financial Position/Balance
Sheet
 Statement of Profit and Loss/Income
Statement
 Statement of Cash Flows
 Statement of Changes in Equity
 Notes to Financial Statements
Elements of financial statements
 The information in the financial statements
is organized into 10 categories called
elements.
 The elements include: assets, liabilities,

equity, contributed capital, revenue,
expenses, distributions, net income, gains
and losses.
Accounts
 The elements are divided into classifications
called accounts.
 For instance there are different kinds of

assets. A business would have a cash
account like a checking account and they
might also own a building.
Chart of accounts
 Every company has a chart of accounts,
sort of like a table of contents in a book.
 Each account is assigned a number
 Usually assets start with 1, liabilities 2,

stockholder’s equity 3, income 4, cost of
goods sold 5, other expenses 6.
General ledger
 Think of it like a book that keeps track of all the
accounts
 It is a chronological record of all the business

transactions
 Sometimes it is called the company’s books
 Everything in the general ledger flows to the

financial statements
Balance Sheet
 Highlights the relative strength of a company
at a point in time.
 Terms related to the balance sheet: assets,

liabilities, owner’s equity.
Assets
 Assets are things you own or resources a business owns.
 The assets of a business belong to its creditors and

investors.
 Tangible assets-this you can touch like machinery,

buildings, land, computers, etc.
 Intangible assets-things you cannot tough such as right to

patents, rights to payments from customers, copyrights or
trademarks.
Liabilities
 Things you owe, future obligations of the
business
 Creditor claims
 Examples include a bank loan or car loan, or

buying supplies for your business on credit
Equity
 Rights of stockholders or their claim on
assets
 There are two types of equity

– Common stock is issued by corporations to
finance their operations
– Retained earnings which is the portion of
earned assets kept in the business
Accounting equation
 This equation is how the balance sheet is
completed.
 Assets=Claims
 Assets=Liabilities + Equity
 Assets=Liabilities + Common stock + Retained

earnings
Accounting equation
 The equation always needs to balance on
both sides of the equal sign.
 This is what people mean when they say

balance the books.
Example of accounting equation
 ABC Company has assets of P20,000 and
liabilities of P5,000. How much is
stockholder’s equity?
 A=L+OE
 20,000=5,000+?
 20,000-5,000=15,000
Income statement
 Also called the P&L (profit and loss statement)
 Shows your revenues and expenses over a period of time

(month, year)
 Revenue is income from the sale of goods
 If revenue is more than expenses, you have net income

 If expenses are more than revenue, you have a net loss
Income statement
 Terms used on the income statement:
 Revenue or sales
 Cost of goods sold or Cost of merchandise
sold
 Gross profit
 Operating expenses
 Net income or net loss
Statement of changes in
Stockholder’s Equity
 Sometimes called statement of changes in
owner’s equity
 Explains the effects of transactions on

stockholder’s equity during the accounting
period.
Statement of changes in
Stockholder’s Equity
 Starts with beginning common stock and
adds any additional shares of stock issued.
 Then it takes the beginning retained

earnings and adds on net income (subtracts
net loss)
 Then it subtracts any dividends paid to

shareholders
Cash flow statement
 This explains how a company obtained and
used cash during the accounting period.
 Receipts of cash are called cash inflows.
 Payments of cash are called cash outflows.

Cash flow statement
 There are three sections to the cash flow
statement: operating, investing and
financing.
 Operating section is first. Operating

activities include receiving cash from
revenue and paying cash for expenses.
Cash flow statement
 Investing section includes paying cash to
buy productive assets (like machinery or
equipment) or receiving cash when you sell
productive assets.
 Financing section includes receiving cash

from owners or paying cash to owners
(dividends) It can also include borrowing
cash from the bank or repaying the cash.
Cash flow statement
 It tells you whether your cash increased or
decreased and why.
How the financial statements are
interrelated
 The income statement is prepared first
 The income from this statement flows to the
statement of changes in stockholder’s equity
 The stockholders equity total and common stock

totals flow to the balance sheet
 The cash from the balance sheet flows to the

statement of cash flows

Introduction To Accounting

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Introduction to accounting

 There needs to be a system or set of rules

 It is the means that business information is

 Realize how much cash you have and if

 Uncover places where costs can be cut.

 i.e. the bank, shareholders

 i.e. break even analysis

 i.e. Income Tax, Value Added Tax, etc.

 To report changes in the financial condition

 Second, summarize the impact of these

 International Accounting Standards (IAS);

 Accountants-prepare financial statements

 Auditors-review the company’s books and look for

 Controller-in charge of the accounting department

 CPAs-certified public accountants

 Typically work for an accounting firm called public

 Once a year come in and do an audit of the books

 CPAs also work for private companies

 The elements include: assets, liabilities,

 For instance there are different kinds of

 Each account is assigned a number

 Usually assets start with 1, liabilities 2,

 It is a chronological record of all the business

 Sometimes it is called the company’s books

 Everything in the general ledger flows to the

 Terms related to the balance sheet: assets,

 The assets of a business belong to its creditors and

 Tangible assets-this you can touch like machinery,

 Intangible assets-things you cannot tough such as right to

 Examples include a bank loan or car loan, or

 There are two types of equity

 Assets=Liabilities + Common stock + Retained

 This is what people mean when they say

 Shows your revenues and expenses over a period of time

 Revenue is income from the sale of goods

 If revenue is more than expenses, you have net income

 Explains the effects of transactions on

 Then it takes the beginning retained

 Then it subtracts any dividends paid to

 Receipts of cash are called cash inflows.

 Payments of cash are called cash outflows.

 Operating section is first. Operating

 Financing section includes receiving cash

 The stockholders equity total and common stock

 The cash from the balance sheet flows to the

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