Financial Accounting

Accounting

Measures Processes Communicates……

Financial information to decision makers

Decision Makers

Individuals Businesses Investors Creditors Taxing Authorities

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

Financial Accounting

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

Managerial Accounting

Accounting Cycle

7

Flow of Accounting Data

Transaction Occurs

Source Documents Prepared

Transaction Analyzed

Transaction Journalized & Posted

Transaction

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

9

Journalizing Transactions

Record transaction in journal, including a brief explanation

10

Journal

Chronological record of the transactions

11

Posting

Posting – copying amounts from the journal to the ledger

Periodically, journal entries are posted to ledger accounts to determine balances in each account

Ledger

A group of accounts for a business entity

13

Flow of Accounting Data

Balances Totaled

Unadjusted Trial Balance

Adjusting Journal Entries Posted

Adjusted Trial Balance

14

Trial Balance

List of all accounts with their balances

15

Flow of Accounting Data

Financial Statements

Closing Entries Posted

Closing Trial Balance

Structure of Accounting

17

Account

Basic summary device Detailed record of increases and

decreases in specific assets, liabilities, or owner’s equity during a period

18

Account Types

Accounts are grouped in 3 broad categories:

Assets

Liabilities

Owner’s Equity

Assets = Liabilities + Owner’s Equity

The resources owned by a

business that have future

value

The Accounting Equation

Assets

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

The rights of the creditors, which

represent debts of the business

Assets = Liabilities + Owner’s Equity

The Accounting Equation

Liabilities

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

The rights of the owners

Assets = Liabilities + Owner’s Equity

The Accounting Equation

Owner’s Equity

Claim of business owner to the assets of the business Capital Withdrawals Revenues Expenses

Revenues

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

Expenses

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

Capital

Varies in structure with the type of business:Sole ProprietorshipPartnershipCorporation

Sole Proprietorship

One owner Not a separate legal entity Not a separate tax entity Unlimited Liability Accounts used:

“Capital” “Draw” or “Withdrawal”

1-29

Partnership

Two or more owners Not a separate legal entity Not a separate tax entity Unlimited Liability Accounts used:

“Capital” for each partner “Draw” or “Withdrawal” for each partner

1-30

Corporation

One or more owners Separate legal entity Separate tax entity Limited Liability Accounts used:

“Paid in Capital” for owners’ investments

“Retained Earnings” for operational profit/loss

Assets = Liabilities + Owner’s Equity

Owner’s Equity

Assets - Liabilities = Owner’s Equity