Accounting

Accounting is an information science used to collect, classify, and manipulate financial data for
organizations and individuals. Or

Accounting is the recording of financial transactions plus storing, sorting, retrieving,

summarizing, and presenting the information in various reports and analyses.

Financial Accounting
One part of accounting focuses on presenting the information in the form of general-purpose
financial statements (balance sheet, income statement, etc.) to people outside of the company.
These external reports must be prepared in accordance with generally accepted accounting
principles often referred to as GAAP or US GAAP. This part of accounting is referred to as
financial accounting.

Management Accounting
Accounting also entails providing a company's management with the information it needs to
keep the business financially healthy. These analyses and reports are not distributed outside of
the company. Some of the information will originate from the recorded transactions but some of
the information will be estimates and projections based on various assumptions. Three examples
of internal analyses and reports are budgets, standards for controlling operations, and estimating
selling prices for quoting new jobs. This area of accounting is known as management accounting.

Tax Accounting
Another part of accounting involves compliance with government regulations pertaining to
income tax reporting.

Role of Accounting
Accounting is the means by which information about an enterprise is communicated and, thus, is
sometimes called the language of business. Many different users have need for accounting
information in order to make important decisions. These users include investors, creditors,
management, governmental agencies, labor unions, and others. Because the primary role of
accounting information is to provide useful information for decision-making purposes, it is
sometimes referred to as a means to an end, with the end being the decision that is helped by the
availability of accounting information.

The FASB and SEC are important organizations in terms of standard setting in the United States.
The FASB is a private-sector organization that works closely with the SEC, which has legal
authority to designate financial reporting standards for publicly held companies. Professional
organizations that provide services to individual accountants in various segments of the
accounting profession are the AICPA, IMA, IIA, and the AAA.

Accounting Equation

The financial position of a company is measured by the following items:

1. Assets (what it owns)

2. Liabilities (what it owes to others)
3. Owner's Equity (investment by owners)

The accounting equation offers us a simple way to understand how these three amounts relate to
each other. The accounting equation for a company is:

Assets = Liabilities + Stockholder’s Equity

Assets are a company's resources—things the company owns. Examples of assets include cash,
accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and
goodwill. From the accounting equation, we see that the amount of assets must equal the
combined amount of liabilities plus stockholders' equity.

Liabilities are a company's obligations—amounts the company owes. Examples of liabilities

include notes or loans payable, accounts payable, salaries and wages payable, interest payable,
and income taxes payable (if the company is a regular corporation). Liabilities can be viewed in
two ways:

1. Claims by creditors against the company's assets, and

2. Source—along with stockholder equity—of the company's assets.

Owner's or stockholders' equity also reports the amounts invested into the company by the
owners plus the cumulative net income of the company that has not been withdrawn or
distributed to the owners.

If a company keeps accurate records, the accounting equation will always be "in balance,"
meaning the left side should always equal the right side. The balance is maintained because
every business transaction affects at least two of a company's accounts. For example, when a
company borrows money from a bank, the company's assets will increase and its liabilities will
increase by the same amount. When a company purchases inventory for cash, one asset will
increase and one asset will decrease. Because there are two or more accounts affected by every
transaction, the accounting system is referred to as double entry accounting.
Balance Sheet
The balance sheet is also referred to as the statement of financial position. The balance sheet
presents a company's financial position at the end of a specified date. Some describe the balance
sheet as a "snapshot" of the company's financial position at a point (a moment or an instant) in
time. For example, the amounts reported on a balance sheet dated December 31, 2012 reflect that
instant when all the transactions through December 31 have been recorded. Because the balance
sheet informs the reader of a company's financial position as of one moment in time, it allows
someone—like a creditor—to see what a company owns as well as what it owes to other parties
as of the date indicated in the heading. This is valuable information to the banker who wants to
determine whether or not a company qualifies for additional credit or loans. Others who would
be interested in the balance sheet include current investors, potential investors, company
management, suppliers, some customers, competitors, government agencies, and labor unions.
Major items of balance sheet are:

 Assets
 Liabilities
 Owner’s/stockholder’s equity

Assets
Assets are things that the company owns. They are the resources of the company that have been
acquired through transactions, and have future economic value that can be measured and
expressed in dollars. Assets also include costs paid in advance that have not yet expired, such as
prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent. Examples of asset
accounts that are reported on a company's balance sheet include: Cash, Petty Cash, temporary
investments, accounts Receivable, inventory, supplies, prepaid Insurance, land, land
improvements, buildings, equipment, goodwill, bond issue costs etc. Usually asset accounts will
have debit balances

Classifications of Assets on the Balance Sheet

Accountants usually prepare classified balance sheets. "Classified" means that the balance sheet
accounts are presented in distinct groupings, categories, or classifications. The asset
classifications and their order of appearance on the balance sheet are:

 Current Assets
 Investments
 Property, Plant, and Equipment
 Intangible Assets
 Other Assets
Income Statement
The income statement is sometimes referred to as the profit and loss statement (P&L), statement
of operations, or statement of income. The income statement is important because it shows the
profitability of a company during the time interval specified in its heading. The period of time
that the statement covers is chosen by the business and will vary. For example, the heading may
state:

 "For the Three Months Ended December 31, 2012" (The period of October 1 through
December 31, 2012.)
 "The Four Weeks Ended December 27, 2012" (The period of November 29 through
December 27, 2012.)
 "The Fiscal Year Ended June 30, 2013" (The period of July 1, 2012 through June 30,
2013.)

Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not
show cash receipts (money you receive) nor cash disbursements (money you pay out).

People pay attention to the profitability of a company for many reasons. For example, if a
company was not able to operate profitably—the bottom line of the income statement indicates a
net loss—a banker/lender/creditor may be hesitant to extend additional credit to the company. On
the other hand, a company that has operated profitably—the bottom line of the income statement
indicates a net income—demonstrated its ability to use borrowed and invested funds in a
successful manner. A company's ability to operate profitably is important to current lenders and
investors, potential lenders and investors, company management, competitors, government
agencies, labor unions, and others.

The format of the income statement or the profit and loss statement will vary according to the
complexity of the business activities. However, most companies will have the following
elements in their income statements:

A. Revenues and Gains

1. Revenues from primary activities

2. Revenues or income from secondary activities
3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)

B. Expenses and Losses

1. Expenses involved in primary activities

2. Expenses from secondary activities
3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)
If the net amount of revenues and gains minus expenses and losses is positive, the bottom line of
the profit and loss statement is labeled as net income. If the net amount (or bottom line) is
negative, there is a net loss.

Cash Flow Statement

The statement of cash flows is one of the main financial statements. The cash flow statement
reports the cash generated and used during the time interval specified in its heading. The period
of time that the statement covers is chosen by the company.

Because the income statement is prepared under the accrual basis of accounting, the revenues
reported may not have been collected. Similarly, the expenses reported on the income statement
might not have been paid. You could review the balance sheet changes to determine the facts, but
the cash flow statement already has integrated all that information. As a result, many business
people and investors utilize this important financial statement.

Here are a few ways the statement of cash flows is used.

1. The cash from operating activities is compared to the company's net income. If the cash
from operating activities is consistently greater than the net income, the company's net
income or earnings are said to be of a "high quality". If the cash from operating activities
is less than net income, a red flag is raised as to why the reported net income is not
turning into cash.
2. Some investors believe that "cash is king". The cash flow statement identifies the cash
that is flowing in and out of the company. If a company is consistently generating more
cash than it is using, the company will be able to increase its dividend, buy back some of
its stock, reduce debt, or acquire another company. All of these are perceived to be good
for stockholder value.
3. Some financial models are based upon cash flow.

Accounting Cycle
The accounting cycle is often described as a process that includes the following steps:
identifying, collecting and analyzing documents and transactions, recording the transactions in
journals, posting the journalized amounts to accounts in the general and subsidiary ledgers,
preparing an unadjusted trial balance, perhaps preparing a worksheet, determining and recording
adjusting entries, preparing an adjusted trial balance, preparing the financial statements,
recording and posting closing entries, preparing a post-closing trial balance, and perhaps
recording reversing entries.

Cycle and steps seem to be a carryover from the days of manual bookkeeping and accounting
when transactions were first written into journals. In a separate step the amounts in the journal
were posted to accounts. At the end of each month, the remaining steps had to take place in order
to get the monthly, manually-prepared financial statements.