The nature of accounting ASSETS = things a company owns LIABILITIES = what the company owes to others OWNER’S EQUITY = what remains after liabilities are deducted from assets

Two main accounting concepts accounting equation double-entry bookkeeping Both were developed centuries ago but remain central to the accounting process.

Assets – Liabilities = Owner’s Equity accounting equation Assets – Liabilities = Owner’s Equity Assets = Liabilities + Owner’s Equity

two main financial statements balance sheet – shows the current financial position of a company profit and loss account (income statement AmE) – shows the results of operations (performance) over a period of time

Two other financial statements 3. Cash flow statement describes how much cash was used in corporate operating, investment, and financing activities over a period of time. The Cash Flow Statement shows how the company is paying for its operations and future growth, by detailing the "flow" of cash between the company and the outside world; positive numbers represent cash flowing in, negative numbers represent cash flowing out. 4. Statement of changes in shareholder equity - reconciles the difference between the equity at the two different points in time

balance sheet Assets are divided into: fixed (not expected to be converted into cash and comprise property, land and equipment) current (include cash and other items - stocks, bonds, amounts due from customers, services paid for but not yet used - that will or can become cash within the following year intangible (include the costs of organizing the business, patents on a process or invention, copyrights on written material, trademarks, goodwill)

balance sheet Liabilities are divided into: current (obligations that will have to be met within a year of the date of the balance sheet) long-term (obligations that fall due a year or more after the date of the balance sheet)

profit and loss account it summarizes: all revenues (or sales), the amounts that have been or are to be received from customers for goods and services delivered to them, and all expenses, the costs that have arisen in generating revenues. when expenses are subtracted from revenues, we obtain the actual profit or loss of a company – the BOTTOM LINE

Auditing Auditing, a related but separate discipline, has two sub-disciplines: External auditing - the process whereby an independent auditor examines an organization's financial statements and accounting records in order to express an opinion as to the truth and fairness of the statements and the accountant's adherence to Generally Accepted Accounting Principles (GAAP). Internal auditing - an examination in which management, and not the external public, is the main beneficiary. It is carried out usually by auditors employed by the company.

The Big 4 (sometimes written as the Big Four) a group of international accountancy and professional services firms that handles the vast majority of audits for publicly traded companies as well as many private companies. The members of the Big 4 are: PricewaterhouseCoopers Deloitte Touche Tohmatsu Ernst & Young KPMG.