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Introduction to Accounting - Coggle Diagram
Introduction to Accounting
What is accounting?
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions
is regarded as the "language of business"
The accounting process
Transactions are the basic inputs into the accounting
process.
The process
Identifying: Taking into consideration all transactions which affect the business
Measuring: Quantifying in monetary terms
Recording: Analysing, recording, classifying and summarising transactions.
Communicating: Preparing accounting reports. analysing and interpreting
Branches of Accounting
Financial Accounting
General-purposed financial reporting ( governed by GAAP, accounting standards)
Intended for external users
Shareholders
Creditors
Suppliers
Regulatory Bodies
Managerial Accounting
Intended for internal decision-making
Targeted Users: Managers who plan and run business activities ( production managers or maketing managers)
Form of organisations
Sole Proprietorship
Owned by only one individual
Example: restaurent, dentist
Partnership
Owned by more than one individual
Examples: accounting, solicitors
Company/ Corporate
Organised as a seperate legal entity
Owned by shareholders
Example:
Financial Statements
Statements of Profit or Loss
Purposed is to report the entity's success or failure over a period of time
Lists the entity's income (revenues or gains) or expenses
Income less expense = profit (loss)
Statements of Changes in Enquity
Reports the changes in a company’s equity over a period of time, particularly those affecting retained earnings and capital transactions
Retained earnings, beginning
+/(-) Net Income (Loss) - Dividends
Retained earnings, ending
Statement of financial position/ Balance Sheet
Reports assets and claims to those assets (liabilities and equity) at a specific point in time.
Based on the basic accounting equation
Assets = liabilities + equity (capital)
Assets must balance to the claims on assets
Statement of Cash Flows
Main purpose is to provide financial information about cash receipts and cash payments of an entity for a specific time period.
Sources and uses of cash classified under operating, investing and financing activities.
Informs users about what is happening to entity’s most important resource – CASH
We are earning profits, but do we have enough cash to pay our obligations?
Qualitative Characteristics of Useful Accounting Information
Fundamental qualitative characteristics
Relevance
accounting information can make a difference on the
decisions made by users
Relevant information should have predictive or feedback value,
communicated in a timely manner.
Materiality
relative importance or significance of an item in
relation to a particular situation or set of facts.
Faithful representation
financial information must not only represent relevant phenomena, but it must also faithfully represent the substance of the phenomena that it purports to represent.
Faithfully represented information would have the following
characteristics: complete, neutral, free from error
Neutrality
supported by prudence (conservatism), assets and income are not overstated and liabilities and expenses are not understated
Enhancing Qualitative Characteristics
Comparability
qualitative characteristic that enables users to
identify and understand similarities in, and differences among, items
Consistency
accounting information can be comparable across different time periods within a business (use of the same accounting methods from year to year
Verifiability
different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation
Timeliness
having information available to decision-makers in time to be
capable of influencing their decisions
Understandability
accounting information should be comprehensible,
assuming users have some reasonable understanding of business