Understanding Principles of Accounting

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Presentation transcript:

Understanding Principles of Accounting Introduction to Business Chapter 8 Understanding Principles of Accounting

Accounting Users of Accounting Information: Accounting is the process of collecting, analyzing and communicating financial information. Bookkeeping: the recording of transactions in the book. Accounting includes bookkeeping. Users of Accounting Information: Business managers Employees and unions Investors and creditors Tax authorities Government regulatory agencies

Managers Creditors Employees Tax Authorities Investors Govt . Users of Accounting Information Managers Creditors Employees Tax Authorities Investors Govt .

Types of Accounting Systems Managerial (Management) Accounting: Controller Manages all of a firm’s accounting activities Types of Accounting Systems Financial Accounting: Accounting concerned with external users of a company’s financial information Managerial (Management) Accounting: Accounting concerned with internal users of a company’s financial information

The Accounting Equation Assets = Liabilities + Owners’ Equity (capital/net worth) Assets – Liabilities = Owners’ Equity Asset Any economic resource that is expected to benefit a firm or an individual who owns it Liability A debt that the firm owes to an outside party Owners’ Equity Money that owners would receive if they sold all of a company’s assets and paid all of its liabilities Capital = Assets - Liabilities

The Double Entry System Each transaction is recorded with at least: One debit One credit Total debits must equal total credits.

Financial Statements Any of several types of reports summarizing a company’s financial status and measuring its financial health. Or (The financial statements are a picture of the company in financial terms) Financial statement includes Balance sheet as well as Trading and profit and loss account.

Balance Sheet: Financial statement detailing a firm’s assets, liabilities and owners equity. II. Trading and Profit and Loss Account (Income Statements): Financial statement listing a firm’s annual revenues and expenses so that a bottom line shows annual profit or loss.