Accounting Process

Accounting is the process of measuring, interpreting, and communicating financial information to support internal and external business decision making.

 Financing activities provide necessary funds to start a business and expand it after it begins operating. Investing activities provide valuable assets required to run a business. Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.

 Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures for determining acceptable accounting practices at a particular time. Financial Accounting Standards Board (FASB) is primarily responsible for evaluating, setting, or modifying GAAP in the U.S.

Accounting process - set of activities involved in converting information about transactions into financial statements.

 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.

Double-entry bookkeeping - process by which accounting transactions are entered; each individual transaction always has an offsetting transaction.

Basic Financial Statements: Balance sheet Profit Loss Account Cash Flow Statement

 Balance sheet - statement of a firms financial positionwhat it owns and the claims against its assetsat a particular point in time.

Photograph of firms assets together with its liabilities and owners equity
Follows the accounting equation

Sections of the balance sheet: Assets - resources of the firm that are expected to increase or cause future cash flows (everything the firm owns) Liabilities - obligations of the firm to outsiders or claims against its assets by outsiders (debts of the firm) Owners Equity - the residual interest in, or remaining claims against, the firms assets after deducting liabilities (rights of the owners)

 Income Statement or Profit and Loss Account - financial record of a companys revenues and expenses, and profits over a period of time.
Firms financial performance in terms of revenues, expenses, and profits over a given time period. Reports profit or loss. Focus on revenues and costs associated with revenues.

 Statement of Owners Equity - is designed to show the components of the change in equity from the end of one fiscal year to the end of the next. Begins with the amount of equity shown on the balance sheet. Net income is added, and cash dividends paid to owners are subtracted.

 Statement of cash flows - a firms cash receipts and cash payments that presents information on its sources and uses of cash. Accrual accounting - method that records revenue and expenses when they occur, not necessarily when cash actually changes hands.

 International Accounting Standards Committee (IASC) promotes worldwide consistency in financial reporting practices. In 2001, became the International Accounting Standards Board (IASB). International Financial Reporting Standards (IFRS) are the standards.

Exchange Rates - ratio at which a countrys currency can be exchanged for other currencies. Consolidated financial statements must reflect gains and losses due to changes in exchange rates. Can have significant impact on financial statement.

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.

Corporate Organization Chart

Annual Report
Contents of A.R :
Contents: non-audited information Narrative items Chairmens statement Directors report Operating and financial review Review of operations Statement of corporate governance Auditors report Statement of directors responsibilities for the financial statements Shareholder information Non-narrative Highlights Historical summary Shareholder analysis