Lecture 2 Accounts

Accounting a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements
Financial accounting focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements.
The Purpose of Accounting Provide information for stakeholders customers, shareholders, suppliers, etc. Provides the opportunity for the business to monitor its own activities Provides transparency to enable the firm to attract investment Reduces the chance for fraud not 100% successful!!
Financial and Management Accounting The major distinction between financial and management accounting is the users of the information. Financial accounting serves external users, such as investors, creditors, and suppliers. Management accounting serves internal users, such as top executives, management, and administrators within organizations.
Objectives of Financial Reporting
Provide information useful to economic decision makers
Allow decision makers to predict businesses future cash flows (and cash flows they will receive from these businesses) Provide information concerning businesses assets and liabilities and related transactions and events
The primary questions about an organization s success that decision makers want to know are: day? How well did the organization do during a given period? Financial and Management Accounting Accountants answer these primary questions with three major financial statements. Balance sheet A financial snapshot of a company at one point in time Income statement shows performance over a given period Statement of cash flows shows performance over a given period What is the financial picture of the organization on a given
Users of Accounting Information
Business Managers
Employees and Unions Investors and Creditors Tax Authorities Government Regulatory Agencies
Forms of Business Organizations

Types of Ownership Three basic forms of ownership: 1. Sole proprietorships 2. Partnerships 3. Company 1. Sole Proprietorship A separate organization with a single owner Tend to be small retail establishments and individual professional or service business The sole proprietorship is an individual entity that is separate and distinct from the personal activities of the owner. 2. Partnership An organization that joins two or more individuals who act as co-owners Dentists, doctors, attorneys, and accountants tend to conduct their activities as partnerships. The partnership is an individual entity that is separate and distinct from the personal activities of each of the partners.
3. Company An artificial entity created under state laws Company have limited liability company creditors have claims against company assets only. Individual investors are at risk only up to the amount they have invested in the company. Creditors cannot hold investors liable for the company s debts. Owners are called shareholders or stockholders.
Publicly owned vs. privately owned corporations

Public - Shares in the ownership are sold to the public on a stock exchange; the company can have many thousands of shareholders. Private - Shares in the ownership are owned by families, small groups of shareholders, or a single shareholder and are not sold to the public.
Stockholders and the Board of Directors

The board has the responsibility to ensure that management acts in the interests of the stockholders.
Primary Objective of a Business

Primary Objective of a Business The management of every business have two primary objectives: Earn a profit The difference from revenue and expenses Stay solvent having sufficient funds to pay debts as they fall due. Other Objective of a Business Providing jobs Protecting the environment Creating new and improved product Providing quality goods and services for less cost
Basic Principles of Accounting

The Accounting Entity Principle distinguishes each organizations from its owners and considering as individual business entity. The Historical Cost Principle assets (resources) recorded at their actual costs or the price paid to purchase them. The Going Concern Principle d assumed that the business entity will continue to operate I n the near future The Accounting Period Principle indefinite life can be assumed for most accounting entities, but the year has been adopted as the primary reporting period. The Matching Principle requires the matching against revenues of all the expenses incurred in earning the revenues during a specific time.

Lecture 2 Accounts

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Accounting a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements

Objectives of Financial Reporting

Provide information useful to economic decision makers

Users of Accounting Information

Forms of Business Organizations

Publicly owned vs. privately owned corporations

Stockholders and the Board of Directors

Primary Objective of a Business

Basic Principles of Accounting

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