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Chapter 1 (Introduction To Accounting)

This document introduces financial and managerial accounting, explaining its purpose, types, and the users of accounting information. It details the accounting process, characteristics of financial accounting, and the basic accounting equation, emphasizing the importance of financial statements for both internal and external stakeholders. Additionally, it discusses the dual effect of business transactions on the accounting equation.

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22 views11 pages

Chapter 1 (Introduction To Accounting)

This document introduces financial and managerial accounting, explaining its purpose, types, and the users of accounting information. It details the accounting process, characteristics of financial accounting, and the basic accounting equation, emphasizing the importance of financial statements for both internal and external stakeholders. Additionally, it discusses the dual effect of business transactions on the accounting equation.

Uploaded by

skm557867
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter One

Introduction to Financial & Managerial Accounting


Chapter Overview
• What is Accounting
• Who are the users of Accounting Information?
• Purpose of Accounting
• The Different Types of Accounting
• Characteristics of Financial Accounting
• The Basic Accounting Equation
• Analyze the effects of business transactions on the accounting equation
What is Accounting
Accounting is the process of identifying, recording, and communicating financial
transactions to provide stakeholders with a clear and accurate picture of a
business’s financial health, performance, and cash flows. It involves identifying,
measuring, and communicating economic information to users, such as Investors,
Creditors, Management, and Regulatory bodies .
Accounting Process:
3 Activities
Who are the users of Accounting Information?
Internal Users: Internal users of accounting information are managers who plan, organize,
and run the business. These include marketing managers, production supervisors, finance
directors, and company officers
External Users:. External users are individuals and organizations outside a company who
want financial information about the company. The two most common types of external
users are investors and creditors.
• Investors (owners) use accounting information to decide whether to buy, hold, or sell
ownership shares of a company.
• Creditors (such as suppliers and bankers) use accounting information to evaluate the
risks of granting credit or lending money
Purpose of Accounting

• Financial position: The balance sheet provides a snapshot of a company’s assets, liabilities,
and equity at a specific point in time.
• Performance: The income statement shows revenues, expenses, and profits (or losses) over a
particular period, helping users evaluate a company’s profitability and efficiency.
• Cash flows: The cash flow statement reveals the inflows and outflows of cash and cash
equivalents, enabling users to understand a company’s liquidity and ability to generate cash.
• External reporting: Financial statements are prepared for external stakeholders, such as
investors, creditors, and regulatory bodies, to inform their decisions about investing, lending,
or conducting business with the company.
• Internal decision-making: Accounting information helps management make informed
decisions about resource allocation, investments, and strategic planning.
• Compliance: Accounting standards and regulations ensure that financial statements are
prepared in a consistent and transparent manner, meeting the requirements of relevant laws
and regulations.
The Different Types of Accounting

Financial accounting Financial accounting involves capturing and summarizing a business’s financial
transactions and creating and reading reports to provide a clear overview of
those business transactions.

Managerial accounting The management accounting method is used by businesses to gain greater
insights into a company’s operations. Since managerial accounting is strictly
focused on providing accounting information for internal use, it doesn’t have to
stick to the same strict GAAP guidelines as financial accounting.

Cost accounting Cost accounting is considered a subcategory of management accounting,


focusing specifically on a company’s cost of doing business.

Tax accounting Tax accounting ensures a business, nonprofit, or individual abides by


applicable tax laws and regulations.

Auditing Auditing is a type of accounting that provides an independent analysis of a


business’s financial activity.
Forensic accounting Forensic accounting investigates discrepancies and fraudulent activities
Characteristics of Financial Accounting
1) Monetary Transactions:
In financial accounting, only transactions in monetary terms are considered. Transactions not
expressed in monetary terms do not find any place in financial accounting, howsoever important
they may be from business point of view.
2) Historical Nature:
Financial accounting considers only those transactions which are of historical nature i.e the
transaction which have already taken place. No futuristic transactions find any place in financial
accounting, howsoever important they may be from business point of view.
3) Legal Requirement:
Financial accounting is a legal requirement. It is necessary to maintain the financial accounting
and prepare financial statements there from. It is also obligatory to get these financial statements
audited.
4) External Use:
Financial accounting is for those people who are not part of decision making process regarding
the organization like investors, customers, suppliers, financial institutions etc. Thus, it is for
external use
Characteristics of Financial Accounting(Contd..)

5) Disclosure of Financial Status:


It discloses the financial status and financial performance of the business as a whole.
6) Interim Reports:
Financial statements which are based on financial accounting are interim reports and
cannot be the final ones.
7) Financial Accounting Process:
The process of financial accounting gets affected due to the different accounting policies
followed by the accountants. These accounting policies differ mainly in two areas:
Valuation of inventory and Calculation of depreciation.
The Basic Accounting Equation

• Assets As noted above, assets are resources a business owns. The business uses its assets in
carrying out such activities as production and sales. The common characteristic possessed by
all assets is the capacity to provide future services or benefits.
• Liabilities are claims against assets—that is, existing debts and obligations. Businesses of all
sizes usually borrow money and purchase merchandise on credit.
• Owner’s equity is the ownership claim on total assets. It is equal to total assets minus total
liabilities. Here is why: The assets of a business are claimed by either creditors or owners. To
find out what belongs to owners, we subtract the creditors’ claims (the liabilities) from assets.
The remainder is the owner’s claim on the assets—the owner’s equity. Since the claims of
creditors must be paid before ownership claims, owner’s equity is often referred to as residual
equity. Owner’s equity is increased by an owner’s investments and by revenues from
business operations. Owner’s equity is decreased by an owner’s withdrawals of assets and by
expenses.
Analyze the effects of business transactions on
the accounting equation
• Transactions (business transactions) are a business’s economic events recorded by
accountants. Transactions may be external or internal.
• External transactions involve economic events between the company and some outside
enterprise. For example, payment of monthly rent to the landlord.
• Internal transactions are economic events that occur entirely within one company. The use of
cooking and cleaning supplies are internal transactions.
• Each transaction must have a dual effect on the accounting equation. For example, if an asset
is increased, there must be a corresponding (1) decrease in another asset, (2) increase in a
specific liability, or (3) increase in owner’s equity
Thank
You

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