ACCOUNTING BASICS &PRINCIPLES

ACCOUNTING BASICS &PRINCIPLES

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  ACCOUNTING BASICS AND PRINCIPLES Preparedby: Christine Michael
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  TOPICS TO BEPRESENTED 1. What is Accounting 2. Objectives of Accounting 3. Basic Accounting Principles and Concepts 4. Financial Information/ Reports 5. Users of financial statements and accounting information.
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  1- WHAT ISACCOUNTING  Accounting is a process of three activities:  Identification Recording Communication
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  2- OBJECTIVES OFACCOUNTING  The goal of accounting is to ensure information provided to decision makers is useful. To be useful information must be;  Relevance &Reliability  faithful representation  Understandability  Comparability  Verifiability  Timeliness
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  3- BASIC ACCOUNTINGPRINCIPLES AND CONCEPTS 1. Business entity 2. Going concern 3. Accrual Basis of Accounting 4. Accounting Period 5. Monetary unit 6. Matching principle 7. Revenue recognition 8. Historical Cost 9. Consistency 10. Full disclosure 11. Materiality 12. Prudence/ Conservatism
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  4- FINANCIAL REPORTS Financial Statements Statement of financial position Statement ofOwner Equity Statement of Cash Flows Statement of profit or loss
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  THE BASIC ACCOUNTINGEQUATION: Assets Liabilities Owners Equity
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  BALANCE SHEET  TheStatement of financial position/ balance sheet shows a business’s assets, liabilities, and equity at a point in time.
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  ASSETS  Assets areresources owned by a business.  They are things of value used in carrying out such activities as production, consumption and exchange.  Characterized as current and non-current.
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  CURRENT AND NONCURRENTASSETS  Current Assets:  Cash and other assets that will be converted into cash during one operating cycle  Non-Current Assets:  Those not expected to be converted into cash in one operating cycle  The common characteristics possessed by all assets is the capacity to provide future services or benefits to the entities that use them.
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  LIABILITIES  Liabilities: areclaims against assets.  They are existing debts and obligations.  Have a known:  Amount, Date to be paid, Person to whom payment owed  Also current and non current.
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  CURRENT AND NONCURRENTLIABILITIES  Current Liabilities: • Debts that will come due within one year from the balance sheet date.  Non-Current Liabilities: • Those debts due more that one year from the balance sheet date.
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  INCOME STATEMENT  Anincome statement communicates information about a business’s financial performance by summarizing revenues less expenses over a period of time.  Income Statement Equation:  Revenues – Expenses = Profit/Loss
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   When revenuesare greater than expenses, the difference is called net income or profit. When expenses are greater than revenue, a net loss results.
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  REVENUE AND EXPENSES Revenues: are created when a business provides products or services to a customer in exchange for assets.  Expenses: are the assets that have been used up or the obligations incurred in the course of earning revenues.
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  STATEMENT OF STOCKHOLDER’SEQUITY Shareholders’ equity represents the net assets owned by the owners (the shareholders). Net assets are assets minus liabilities. THE STATEMENT OF CASH FLOWS (SCF) The fourth financial statement is the statement of cash flows. The SCF explains the sources (inflows) and uses (outflows) of cash over a period of time.
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  5- USERS OFFINANCIAL STATEMENTS/ACCOUNTING INFORMATION Internal Users:  Managers of the company  Employees of the company External Users:  Shareholders of the company  Trade contacts(Suppliers)  Providers of finance (Bank)  Customers  The governments authorities  The public