Chapter 1 Accounting in Action

What is Accounting?  An information system that identifies, records and communicates economic events Identify: select activities that are evidence of economic activity Record: keep a chronological diary of events measured in dollars and cents Communicate: create standardized financial statements

Internal Users  Plan, organize and run a business e.g. marketing managers, production supervisors, finance directors, company officers  Questions asked by internal users: 1. Is cash sufficient to pay bills? (finance dept.) 2. What is the cost of manufacturing each unit of product? (production dept.) 3. Can we afford to give raises this year? (HR dept.) 4. Which product line is the most profitable? (marketing dept.)

External Users  Work for other organizations but have an interest in the financial position of the company E.g. creditors, government, regulatory agencies, customers  Questions asked by external users: 1. Is the company earning satisfactory income? 2. How does the company compare in size and profitability with competitors? 3. Will the company be able to pay its debts as they come due?

Accounting 1. Includes bookkeeping 2. Also includes much more Bookkeeping 1. Involves only the recording of economic events 2. Is just one part of accounting Bookkeeping vs. Accounting

The Accounting Profession  Public accountants offer their expertise to the general public  Private accountants are employees of individual companies and are involved in a number of activities, including cost and tax accounting, systems, and internal auditing  Not-for-profit accounting includes reporting and control for government units, foundations, hospitals, labour unions, colleges/universities, and charities

Assets = Liabilities + Owner’s Equity The Basic Accounting Equation

Definitions  Assets are resources owned by a business  Liabilities are claims against assets (debts or obligations)  Owner’s equity is the owner’s claim on the assets of the business

Definitions Continued  Drawings are withdrawals of cash or other assets by the owner for personal use; they decrease owner’s equity  Revenues are the increases in owner’s equity resulting from business activities entered into for the purposes of earning income  Expenses are the decreases in owner’s equity that result from operating the business

Financial Statements  Financial statements are prepared from summarized accounting data: Income statement: presents revenues, expenses, net income or net loss for a specific period of time Statement of Changes in Owner’s Equity: summarizes the changes in owner’s equity for a specific period of time Balance Sheet: reports assets, liabilities, and owner’s equity at a specific date Cash Flow Statement: summarizes cash inflows and outflows for a period of time