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UNDERSTANDING ACCOUNTING AND FINANCIAL INFORMATION - Coggle Diagram
UNDERSTANDING ACCOUNTING AND FINANCIAL INFORMATION
What is Accounting?
Is recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions.
Accounting Disciplines
Auditing:
The job of reviewing and evaluating the information used to prepare a company’s financial statements.
Tax Accounting:
An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies.
Financial Accounting:
Accounting information and analyses prepared for people outside the organization.
Government and not-for-profit accounting:
Accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget.
Managerial Accounting:
Accounting used to provide information and analyses to managers inside the organization to assist them in decision making.
The Accounting Cycle
Double-Entry Bookkeeping:
The practice of writing every business transaction in two places.
Ledger:
A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place.
Journal
: The record book or computer program where accounting data are first entered.
Trial Balance
: A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced.
Bookkeeping:
The recording of business transactions.
Key Financial Statements
The Fundamental Accounting Equation:
Assets = Liabilities + Owners’ equity; this is the basis for the balance sheet.
Balance Sheet:
Financial statement that reports a firm’s financial condition at a specific time and is composed of three major accounts: assets, liabilities, and owners’ equity.
Liabilities and Owner´s Equity Accounts:
Liabilities: What the business owes to others (debts).
Owner´s Equity: The amount of the business that belongs to the owners minus any liabilities owed by the business.
The Income Statement:
The financial statement that shows a firm’s profit after costs, expenses, and taxes; it summarizes all of the revenue, all the expenses, and the resulting net income or net loss.
Revenue:
Is the monetary value of what a firm received for goods sold, services rendered, and other payments
Operating Expenses:
Costs involved in operating a business, such as rent, utilities, and salaries.
Net Profit or Loss:
After deducting all expenses, we can determine the firm’s net income before taxes, also referred to as net earnings or net profit.
Cost of Goods Sold:
A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale.
The Statement of Cash Flows:
Financial statement that reports cash receipts and disbursements related to a firm’s three major activities: operations, investments, and financing.
Ratio Analysis:
The assessment of a firm’s financial condition using calculations and interpretations of financial ratios developed from the firm’s financial statements.
Leverage Ratios
: measure the degree to which a firm relies on borrowed funds in its operations.
Profitability Ratios:
measure how effectively a firm’s managers are using its various resources to achieve profits.
Liquidity Ratios
: measure a company’s ability to turn assets into cash to pay its short-term debts.
Activity Ratios:
measures the speed with which inventory moves through the firm and gets converted into sales.