Financial Accounting Accounting n n n Measures Processes

Financial Accounting

Accounting n n n Measures Processes Communicates…… Financial information to decision makers

Decision Makers n n n Individuals Businesses Investors Creditors Taxing Authorities

Financial Accounting Financial accounting is primarily concerned with the recording and reporting of economic data and activities for a business for outside users.

Managerial Accounting Managerial accounting uses both financial accounting and estimated data to aid management in running day-today operations and in planning future operations.

Accounting Cycle

Flow of Accounting Data Transaction Occurs Source Documents Prepared Transaction Analyzed Transaction Journalized & Posted 7

Transaction n An event that affects the financial position of a particular entity and can be recorded reliably

Journalizing Transactions n Record transaction in journal, including a brief explanation 9

Journal n Chronological record of the transactions 10

Posting n n Posting – copying amounts from the journal to the ledger Periodically, journal entries are posted to ledger accounts to determine balances in each account 11

Ledger n A group of accounts for a business entity

Flow of Accounting Data Balances Totaled Unadjusted Trial Balance Adjusting Journal Entries Posted Adjusted Trial Balance 13

Trial Balance n List of all accounts with their balances 14

Flow of Accounting Data Financial Statements Closing Entries Posted Closing Trial Balance 15

Structure of Accounting

Account n n Basic summary device Detailed record of increases and decreases in specific assets, liabilities, or owner’s equity during a period 17

Account Types Accounts are grouped in 3 broad categories: Assets Liabilities Owner’s Equity 18

The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business that have future value

Assets n Economic resources, expected to benefit the business in the future n n n Cash Accounts receivable Merchandise inventory Furniture Land

The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business

Liabilities n Economic obligations payable to an individual or organization outside the business n Accounts payable n Notes payable n Salary payable

The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners

Owner’s Equity n Claim of business owner to the assets of the business n n Capital Withdrawals Revenues Expenses

Revenues n Amounts earned by delivering goods or services to customers n Sales revenue n Service revenue n Interest revenue n Dividend revenue

Expenses n Decrease in owner’s equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers n n Salary expense Rent expense Utilities expense Interest expense

Capital n Varies in structure with the type of business: n Sole Proprietorship n Partnership n Corporation

Sole Proprietorship n n n One owner Not a separate legal entity Not a separate tax entity Unlimited Liability Accounts used: n “Capital” n “Draw” or “Withdrawal”

1 -29 Partnership n n n Two or more owners Not a separate legal entity Not a separate tax entity Unlimited Liability Accounts used: n “Capital” for each partner n “Draw” or “Withdrawal” for each partner

1 -30 Corporation n n One or more owners Separate legal entity Separate tax entity Limited Liability Accounts used: n “Paid in Capital” for owners’ investments n “Retained Earnings” for operational profit/loss

Owner’s Equity Assets -=Liabilities=+Owner’s. Equity