Introduction to Accounting

Accounting is defined as a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions, in making reasoned choices among alternative courses of action. Financial accounting information is meant for external use. Stockholders and creditors are examples of people outside a company who want and need financial accounting information. These outside people make decisions on matters pertaining to the entire company, such as whether to extend credit to a company or to invest in a company. Consequently, financial accounting information relates to the company as a whole, while managerial accounting focuses on the parts or segments of the company. 1. Owners and prospective owners (investors). They are the providers of risk capital and are concerned with the risk inherent in it, and the return provided by their investments . They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends. 2. Creditors (lenders). Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them will be paid when due. 3. Governments and their agencies. Government and their agencies are interested in the allocation of resources and, therefore, the activities of entities. They also require information in order to regulate the activities of the entities, determine taxation policies and as the basis for national income and similar statistics. 4. Employees. Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables to assess the ability of the entity to provide salaries, retirement benefits and employment opportunities. 5. Customers. Customers have an interest in information about the continuance of an entity, especially when they have a long-term involvement with, or are dependent, the entity. 6. General public. Entities affect members of the public in a variety of ways. For example, entities may make a substantial contribution to the local economy in may ways including the number of people they employ and their patronage of the local; suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the entity and the range of its activities.

A business entity is any business organization such as a department store or a restaurant that exists as an economic unit. For accounting purposes, the business entity concept considers each business organization separate and distinct from the owners and from other businesses. A sole proprietorship is a form of business owned and managed by only one individual. Sole proprietors include physicians , lawyers, public accountants, and other people who are in business for them. Many small service-type businesses and retail establishments are single proprietorships. There are no legal formalities in organizing such businesses, and usually the owners investment to begin operations. A Partnership is a form of business organization owned by two or more individuals who contribute money, property or industry to a common fund, to carry on a business for profit. The partners are the owners of this type of business that they usually manage. Many small retail establishments and professional practices such as lawyers, physicians, engineers, and CPAs are partnerships. A corporation is a separate legal entity, organized in accordance with the corporation law, which divides their ownership into shares of stocks. Almost all large businesses and many small businesses are corporations. Service companies perform services for a fee such as accounting firms, law firms, repair shops, dress shops, beauty parlors; and many others. Accounting for service companies will be illustrated in the early chapters of this book. Merchandising companies purchase goods in a salable form and sell to customers to make a profit. Merchandising companies include groceries, department stores, hardware, drugstores, and the like. Accounting for merchandising companies will be illustrated in later chapters. Manufacturing companies obtain raw materials and supplies, convert into different finished products , and then sell them to other companies or to final customers. Examples are steel mills, auto manufacturers, and clothing manufacturers. The accounting system for a manufacturing company is more complex and requires more detailed accounting records. Financial statements are structured financial representation of the financial position of and the transactions undertaken by an enterprise . the objective of the general-purpose financial statements is to provide information about the financial position, performance

and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements also show the results of managements stewardship f the resources entrusted to it. 1. Balance sheet, sometimes called the statement of financial position, is the list of assets , liabilities and owners equity of a business entity as of a specific date, usually the end of a month or a year. 2. Income statement, sometimes called earnings statement, is the summary of the revenue and expenses of a business entity as of a specific period of time. In accounting, we measure profitability for a period of time, such as a month or a year, by comparing the revenues generated with the expenses incurred to produce this revenue. 3. Statement of changes in owners equity presents a summary of changes that occurred in the owners equity of an entity during a specific time period. Increases in owners equity arise from investments by the owner and net income earned during the period. Decreases result from withdrawals and from a net loss for the period. 4. Statement of cash flows reports cash receipts and cash disbursements classified according to the entitys major activities: operating, investing, and financing. The statement reports a net cash flow or a net cash outflow for each activity and for the business overall. 5. Statement of comprehensive income.Comprehensive income is the companys change in the total stockholders equity from sources other than from its owners. 6. Notes, comprising a summary of significant accounting policies and other explanatory notes. 1. Assets are resources acquired by a firm as a result of past transactions or events and from which future economic benefits are expected to flow to the enterprise. The most common assets include the following: a. Cash is any medium of exchange that the bank will accept at face value. b. Accounts Receivable are claims against debtors or customers arising from the sale of merchandise or services on account. c. Notes Receivable are claims against debtor evidenced by a written promise to pay. d. Merchandise Inventories are goods held for sale. e. Suppliesare goods in the operations of the business. They are normally classified as office supplies and store supplies.

f. Prepaid Expenses are3 expenses paid in advance, like rent, insurance, and taxes. g. Equipment include computers, calculator, electric fan, air conditioners, telephone, switchboard. typewriters, and the like. h. Furniture and fixtures are made mostly of wood, like desks, chairs, conference tables, and built-in cabinets. 2. Liabilities are also defined as present obligations of the enterprise arising from past transactions or events the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. It includes accounts ends mostly with the term payable such as: a. Accounts payable are amounts due to creditors arising from the purchase of merchandise or services on account. b. Notes Payable are amounts due to creditors evidenced by a written promise to pay. c. Salaries Payable are unpaid salaries due to the employees. d. Taxes Payable are unpaid taxes due to the government. e. Interest Payable represents interest on money borrowed incurred but not yet paid at the end of the period. f. Mortgage Payable are long-term debts secured by a collateral 3. Owners equity or capital It is the residual interest in the assets of the enterprise after deducting all its liabilities. PERFORMANCE 1. Revenue or Income is the inflow resulting from the sale of goods or rendering of services to customers. 2. Expenses are costs incurred to produce revenue. Expenses may also be defined as the gross outflow of economic benefits during the period in the course of ordinary activities when those outflows result in decrease in equity, other than those relating to distributions to owners. Net income is the excess of the revenues of a period over the expenses of the same period. Net income is the earnings of the company. If the expenses exceed revenues, the business has a net loss. And it has operated unprofitably.

1. Auditing, examines accounting records and the financial statement of the companies and presents an opinion as to the fairness and accuracy of the accounting data. 2. Management advisory services, employs both historical and estimated data in assisting management with day to day problems and planning for the future. 3. Tax Services, involves the preparation of tax returns and the consideration of proposed business transactions. Private Accounting provides services to a particular type of business firm. Some companies employ only one private accountant, while other companies employ many. 1. General or financial accounting is the field of accounting concerned with the recording of transactions of an economic unit and the preparation of reports from these records. 2. Cost accounting involves the determination and the control of costs, particularly the costs of manufacturing processes and manufactured products. 3. Budgeting presents a plan of financial operations for a period, and provides comparison of actual with the predetermined plan. 4. Internal auditing evaluates the firms own accounting and management system.