Learning Goals :

Explains the functions and importance of accounting, and identify the three basic activities involving accounting.

Identify the foundations of the accounting system, including GAAP and the role of the Financial Accounting Standards Board (FASB).
Outline the steps in the accounting cycle, and define doubleentry bookkeeping and the accounting equation.

 Explains the functions and major components of the four principal financial statements: the balance sheet, the income statement, the statement of owners equity, and the statement of cash flows. Discuss how financial ratios are used to analyze a companys financial strengths and weaknesses. Describes the role of budgets in a business. Outline accounting issues facing global business and the move toward one set of worldwide accounting rules.

 Accounting is the process of measuring, interpreting, and communicating financial information to support internal and external business decision making (End Users )

Accounting The Language of Business

Accounting is the information system that...

measures business activities,

processes data into reports, and communicates results to decision makers.
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Accounting is the language of business.

Finance uses accounting information together with other information to make decisions that affect the market value of the firm There are three primary decision areas that are of concern.

Three decision areas of Finance

Investment decisions - What assets should the company hold? This determines the left-hand side of the balance sheet. Financing decisions - How should the company pay for the investments it makes? This determines the right-hand side of the balance sheet. Dividend decisions - What should be done with the profits of the business?

Users of accounting information

Customers

Owners

Government

Managers

Employees Creditors and Financial Institution

Investor

Objectives of accounting : 1) Systematic recording and measuring of the business transactions 2)Calculation of profit or loss 3) Depiction of financial position 4)To make information available to various group and users at a particular time. 5) To know the solvency position

Important terms in accounting

Debtors Creditors Assets Liabilities Income Expenses Account

Organizations that Influence Accounting

American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB) Securities and Exchange Commission (SEC) Internal Revenue Service (IRS)

Hospitality Financial and Technology Professionals (HFTP)

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Methods of Accounting

a) Cash Basis Accounting Method Recognizes accounting transaction at point of cash inflow or outflow b) Accrual Basis Accounting Method Recognizes all revenues earned and records all expenses incurred for the period Matches expenses with revenues Requires adjusting entries

Sub fields of accounting

Management accounting

Financial accounting

Cost accounting

Financial Accounting Statutory External focus GAAP Audit End products: BS, IS, CFS

Cost and Management Accounting Not statutory Internal focus Non-GAAP No audit End product: depends on the managerial requirement

ACCOUNTING CYCLE
1. Analyze transaction

2. Journalize original entries

3. Post journal entries to ledger 4. Identify, journalize and post adjusting entries

5. Journalize and post closing entries

6. Prepare financial statements

Bookkeeping Vs. Accounting

Bookkeeping
1) Recording of transaction 2) Base for accounting 3) Decision cannot be taken 4) No sub-field 5) Financial position cannot be ascertained

Accounting
1) Summarizing transactions. 2) Language of the business. 3) Decisions can be taken 4) Several sub-fields 5)Financial position can ascertained

Accounting as an Aid to Decision Making

Fundamental relationships in the decisionmaking process:

Event

Accountants analysis & recording

Financial Statements

Users

Accounting Equation
Assets - anything of value owned or leased by a business. Liability - claim against a firms assets by a creditor. Owners equity - all claims of the proprietor, partners, or stockholders against the assets of a firm, equal to the excess of assets over liabilities. Basic accounting equation - relationship that states that assets equal liabilities plus owners equity. Assets = Liabilities + Owners equity Double-entry bookkeeping - process by which accounting transactions are entered; each individual transaction always has an offsetting transaction
Accounting equation

Accounting Equation
ASSETS = EQUITIES

ASSETS = LIABILITIES + OWNERS' EQUITY

Accounting Equation

Major Financial Statements

Balance Sheet Outlines the fundamental accounting equation Income Statement Also called profit & loss statement Shows results of operations for a period Statement of Cash Flows (SCF) Shows cash inflows and outflows for a period

What about Stakeholders?

Stakeholders include groups that have direct economic links to the firm.
Stakeholders include not only owners, but also employees, customers, suppliers, and creditors. Maintaining positive stakeholder relationships helps maximize long-term benefits to shareholders.

Economic Value Added EVA

EVA measures whether an investment contributes to shareholder wealth.

EVA is the surplus left after providing a charge on the capital employed in the business simplest calculation EVA = PAT COST OF EQUITY x EQUITY While popular, EVA is essentially derived from the concept of net present value.

Corporate Organization Chart

 Annual Report : Annual report - a document prepared by management and distributed to current and potential investors to inform them about the companys past performance and future prospects. The annual report is one of the most common sources of financial information used by investors and managers

 The annual report usually includes: A letter from corporate management A discussion and analysis of recent economic events by management Footnotes that explain many elements of the financial statements in more detail The report of the independent auditors A statement of managements responsibility for preparation of the financial statements and other corporate information