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Intro to Business
Table of Contents
Unit 14 Overview: Financial Information & Accounting Basics
14.1 Accounting: More than Numbers
14.2 The Accounting Profession
14.3 Basic Accounting Procedures
14.4 The Balance Sheet
14.5 The Income Statement
14.6 The Statement of Cash Flows
14.7 Analyzing Financial Statements
14.8 Trends in Accounting

Accounting is the language of business, helping companies track their financial health. It involves recording transactions, analyzing data, and creating reports that show how a business is doing money-wise.

The accounting cycle, bookkeeping vs. accounting, and the accounting equation are key concepts. These tools help businesses keep tabs on their cash, debts, and overall financial picture, which is crucial for making smart decisions.

Accounting Fundamentals

Accounting Cycle

  • Process of recording, analyzing, and reporting financial transactions over an accounting period (month, quarter, year)
  • Six steps of the accounting cycle:
    1. Analyze and record transactions in a journal (journalizing)
    2. Post transactions from journal to ledger, organizing by account
    3. Prepare unadjusted trial balance listing all account balances, ensuring total debits equal total credits
    4. Prepare adjusting entries for accruals, deferrals, and other adjustments at period end
    5. Prepare adjusted trial balance incorporating adjusting entries, ensuring accounts remain balanced
    6. Prepare financial statements (income statement, balance sheet, cash flow statement) reporting company's financial performance and position

Accounting vs Bookkeeping

  • Bookkeeping: Component of accounting focusing on recording financial transactions
    • Maintains accurate records of company's financial activities
    • Tasks include recording transactions, posting to ledgers, preparing trial balances
  • Accounting: Encompasses bookkeeping and additional functions
    • Analyzes, interprets, and communicates financial information
    • Tasks include preparing financial statements, analyzing financial data, providing insights for decision-making
    • Requires higher level of expertise and knowledge of accounting principles and standards

Accounting Equation

  • Represents relationship between company's assets, liabilities, and owners' equity
    • Formula: $Assets = Liabilities + Owners' Equity$
  • Assets: Resources owned by company with economic value (cash, inventory, equipment, accounts receivable)
  • Liabilities: Company's financial obligations or debts (accounts payable, loans, taxes owed)
  • Owners' equity: Owners' residual claim on company's assets after deducting liabilities
    • Consists of contributed capital (investments by owners) and retained earnings (accumulated profits)
  • Accounting equation must always be in balance, changes in one component offset by changes in another to maintain balance

Key Terms to Review (35)

Blockchain technology: Blockchain technology is a decentralized, digital ledger system that records transactions across many computers in a way that ensures the security and integrity of the data. Each block in the chain contains a number of transactions; once completed, a new block is generated and linked to the previous one, making it nearly impossible to alter past transactions.
Balance sheet: A balance sheet is a financial statement that provides a snapshot of a company's financial condition at a specific point in time, detailing its assets, liabilities, and shareholders' equity. It is essential for assessing the company's liquidity, solvency, and overall financial health.
Owners’ equity: Owners' equity represents the owner's claim on the assets of a business, essentially the amount of money that would be returned to owners if all of the company's assets were liquidated and all its debts paid off. It is calculated as the business's total assets minus its total liabilities.
Inventory: Inventory encompasses all the goods and materials a business holds for the purpose of resale, use in production, or other operational purposes. It is a crucial component of supply chain management, ensuring that products are available to meet customer demand without excessive surplus.
Double-entry bookkeeping: Double-entry bookkeeping is an accounting system where every transaction affects at least two accounts, with one debit and one credit recorded for each. This method ensures the accounting equation (Assets = Liabilities + Equity) stays balanced after every transaction.
Statement of cash flows: The Statement of Cash Flows is a financial report that details how a company's cash position changes over a period due to its operating, investing, and financing activities. It provides insights into the company's liquidity and its ability to cover expenses and debts.
Fixed assets: Fixed assets are long-term tangible assets that a company owns and uses in its operations to generate income. These assets are not expected to be converted into cash within a year and include items like property, plant, and equipment (PP&E).
Retained earnings: Retained earnings are the portion of a company's profits not distributed to shareholders as dividends but kept in the company to reinvest in its core business or to pay off debt. They are found under shareholders' equity on the balance sheet.
Accounts receivable: Accounts receivable is the total amount of money owed to a company by its customers for goods or services that have been delivered or used but not yet paid for. It is considered a current asset on a company's balance sheet.
Blockchain: Blockchain is a decentralized, distributed digital ledger that records transactions across many computers in a network. It is the underlying technology that powers cryptocurrencies like Bitcoin, but its applications extend far beyond the financial sector, impacting various aspects of business and society.
Depreciation: Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It represents the gradual decrease in the value of an asset due to usage, time, or obsolescence. Depreciation is a critical concept in understanding financial statements and the overall financial health of a business.
Inventory: Inventory refers to the stock of goods or materials that a business holds for the purpose of resale or use in the production of goods. It is a critical component of a company's assets and plays a vital role in the distribution, accounting, and financial reporting processes.
Income Statement: The income statement, also known as the profit and loss statement, is a financial report that summarizes a company's revenues, expenses, and net income or loss over a specific period of time. It is a crucial component in understanding a business's financial performance and profitability.
Accrued Expenses: Accrued expenses are liabilities that have been incurred but not yet paid for by a company. These are expenses that have been recognized in the accounting records but for which no invoice has been received or payment made. Accrued expenses are a crucial concept in the context of basic accounting procedures and the balance sheet.
Liabilities: Liabilities are the financial obligations or debts that a company or individual owes to others. They represent the claims that creditors have on the company's assets and must be paid off or settled over time.
Generally Accepted Accounting Principles (GAAP): Generally Accepted Accounting Principles (GAAP) are the standard framework of guidelines, rules, and procedures that accountants must follow when preparing and presenting financial statements. GAAP ensures consistency, transparency, and comparability in financial reporting across organizations.
Balance Sheet: The balance sheet is a financial statement that provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. It serves as a fundamental tool for understanding a business's financial position and is a crucial component of the overall financial reporting process.
Accrual Basis Accounting: Accrual basis accounting is an accounting method that records revenues and expenses when they are earned or incurred, rather than when cash is received or paid. This approach provides a more accurate representation of a company's financial position and performance by matching revenues and expenses to the appropriate accounting period.
QuickBooks: QuickBooks is a popular accounting software suite designed to help small and medium-sized businesses manage their financial records, invoicing, payroll, and other accounting tasks. It provides a comprehensive set of tools and features to streamline the accounting process and improve financial management for businesses.
Cash Basis Accounting: Cash basis accounting is an accounting method where revenues and expenses are recorded when cash is received or paid, rather than when the transaction occurs. This contrasts with accrual basis accounting, where revenues and expenses are recorded when earned or incurred, regardless of when cash is exchanged.
Chart of Accounts: A chart of accounts is a comprehensive list of all the accounts used in an organization's general ledger. It serves as the foundation for the organization's accounting system, providing a structured way to categorize and record all financial transactions.
Accounts Receivable: Accounts receivable refers to the money owed to a business by its customers for goods or services provided on credit. It represents the short-term, uncollected revenue that a company has earned but not yet received payment for, and it is an important component of a company's working capital and overall financial health.
Xero: Xero is a cloud-based accounting software that provides small businesses with a comprehensive suite of financial management tools. It enables users to streamline their accounting processes, collaborate with their team, and access real-time financial data from anywhere with an internet connection.
Assets: Assets are resources owned or controlled by a business that have monetary value and are expected to provide future economic benefits. They are essential components of a company's balance sheet, representing the valuable items the business possesses and can utilize to generate revenue and growth.
Retained Earnings: Retained earnings represent the portion of a company's net income that is retained or saved rather than distributed to shareholders as dividends. It is an important component of a company's balance sheet, reflecting the accumulation of its past profits over time.
Prepaid Expenses: Prepaid expenses are costs that have been paid in advance for goods or services that have not yet been consumed or used. These expenses are recorded as assets on a company's balance sheet until the benefits are realized, at which point they are recognized as expenses on the income statement.
Financial Reporting: Financial reporting is the process of providing information about a company's financial performance and position to internal and external stakeholders, such as investors, creditors, and regulators. It involves the preparation and presentation of financial statements that communicate the company's financial health, profitability, and cash flows.
Accounts Payable: Accounts payable refers to the short-term obligations or debts a business owes to its suppliers or vendors for goods and services purchased on credit. It represents the amount a company owes to its creditors and is a crucial component of the balance sheet.
Unadjusted Trial Balance: An unadjusted trial balance is a financial statement that lists all of a company's general ledger accounts and their debit or credit balances before any adjusting entries have been made. It serves as a starting point for the accounting cycle and helps ensure the equality of debits and credits in the general ledger.
Statement of cash flows: The statement of cash flows is a financial statement that provides information about a company's cash inflows and outflows during a specific period of time. It is one of the three primary financial statements, along with the balance sheet and income statement, that are used to analyze a company's financial health and performance.
Ledger Accounts: Ledger accounts are the individual records that make up a company's general ledger, which is the core of the accounting system. Ledger accounts systematically organize and track all financial transactions, providing a comprehensive record of a business's assets, liabilities, equity, revenues, and expenses.
General Journal: The general journal is a record of all the financial transactions of a business, chronologically recorded as they occur. It serves as the primary book of entry, where every business transaction is initially recorded before being posted to the appropriate accounts in the general ledger.
Double-Entry Bookkeeping: Double-entry bookkeeping is an accounting system where every business transaction is recorded in at least two accounts, with a debit entry in one account and a corresponding credit entry in another account. This system ensures that the accounting equation, Assets = Liabilities + Equity, is always balanced.
Owners' Equity: Owners' Equity, also known as shareholders' equity or net worth, represents the residual claim on the assets of a business after all liabilities have been paid. It is the amount of the business that belongs to the owners or shareholders.
Adjusting Entries: Adjusting entries are journal entries made at the end of an accounting period to update the accounts and ensure the financial statements accurately reflect the company's financial position and performance. These entries are necessary to properly match revenues and expenses, and to record accruals and deferrals.