Financial Accounting An Overview

CHAP-1

Accounting
According to American Institute of Certified Public Accountants (AICPA) accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events, which are, in part at least, of a financial character, and interpreting the results thereof.

Financial Accounting Vs Management Accounting

Financial accounting is used primarily by those OUTSIDE of a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period .

Management Accounting is used primarily by those WITHIN a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly

The accounting process

Economic activities

Accounting links decision makers with economic activities and with the results of their decisions.
Decision makers

Accounting

information

Actions (decisions)

Users of Accounting Information

Investors --Concerned with the risk inherent in, and return provided by, their investments . --whether they should buy, hold or sell . --to assess the ability of the enterprise to pay dividends . Employees --To assess stability and profitability of their employers --To assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.

Lenders --To determine whether their loans, and the interest attaching to them, will be paid when due. Suppliers and other trade creditors --To know whether amounts owing to them will be paid when due. Customers --Have interest in information about the continuance of an enterprise .

Governments and their agencies --interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises, determine taxation policies and as the basis for national income and similar statistics
Public --enterprises may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers.

Accounting Assumptions
Separate Entity Concept- the entity is separate and distinct from the owners and the entity is liable to the Owner. Going Concern Concept-Continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. .Money Measurement- Representation in a common denominator and amenable to summarization by addition & subtraction. .

Periodicity- This assumption requires that the activities of an enterprise be divided into artificial time period usually as long as year but sometimes as short as a quarter

Accounting equation
Assets Resources = Liabilities + Owners Equity Claim on Resources

Assets = Liabilities + Owners Equity + Revenues

- expenses
+ Gains - Losses + Contributions - With drawls