UNIT 3: THE NATURE OF ACCOUNTING

Accounting is the system that measures financial performance of a business. It is

doing that by recording and classifying sales, purchases and other transactions.
It provides ways to present this information that make it possible to evaluate a
companys past performance, present condition and future prospect.
Accountants are guided by two fundamental principles: the accounting equation
and double-entry bookkeeping.
Businesses keep records of their assets things they own and liabilities things
they owe to other. For businesses are also important the owners equity. The
owners equity is what is left after assets are deducted from liabilities.
Liabilities are in front of the assets because creditors have first claim on assets.
After liabilities are paid, anything left over belongs to the owner.
Double-entry bookkeeping is used to keep accounting equation in balance. This is
a system that record every transaction affecting assets and liabilities or owners
equity. The accounting equation must be in balance and this is possible only if
transaction are properly recorded.
Financial statements are summarize transactions. Two most important are THE
balance sheet and income statement in US or profit and loss account in GB.
A balance sheet is a financial statement that summarize a companys assets,
liabilities and owners equity in specific point in time. Every company prepares a
balance sheet at least once a month, most often at the end of a calendar year.
Many business and government bodies use a fiscal year. Fiscal year may be any
12 consecutive months.
A balance sheet have two sides. Accounts such as cash, inventory and property
are on the asset side of the balance sheet. Assets are divided into three types of
assets current, fixed and intangible. They are listed in order of ease which can
be turn into cash.
Current assets include cash and other items like stocks, bonds, amount due from
customers, services that are paid but not delivered. These are items that can or
will become cash within the following year. Fixed assets include land, equipment
and other property. Fixed assets are not expected to be converted cash.
Intangible assets include the cost of organizing the business, patents on a
process or invention, copyrights on written material, trademarks and goodwill.
Goodwill consists mainly of a companys reputation, especially on its relations
with customers.
Liabilities may be current (obligations that will have to met within a year of the
date of the balance sheet) and long term (obligation that fall due a year or more
after the date of the balance sheet).
The income statement (profit and loss account) is financial statement that
measures a companys financial performance over a period of time. It summarize
all revenues (or sales), the amount that have been or are to be received from
customer for goods and services delivered to them and all expenses, the cost
that have arisen in generating revenues. It then subtracts expenses from

revenues to show the actual profit or loss of a company. This figure is known as
net income or bottom line.
The cash flow statement records the amounts of cash and cash equivalents
entering and leaving a company. This statement describes how much cash was
used in corporate operating, investments and financial activities over a period of
time.
The statement of changes of shareholder equity reconciles the difference
between the equity at the two different points in time.
Auditing is examination and evaluation of companys financial statements. It
can be done internally (by employees of the organization) or externally (by an
outside, independent organization).

UNIT 4: THE CENTRALITY OF MARKETING