FINANCE AND COST ACCOUNTING
CHAPTER 1
The nature of accounting
Accounting organizes and summarizes economic information so decision makers can use it.
Accountants present this information in reports called financial statements. An organization’s
accounting system is the series of steps it uses to record financial data and convert them into
informative financial statements.
Economic Analyzed Accountants Summarized Financial Communicated Information
event & recorded Analysis & info statements to users
recording
Financial and management accounting
Financial accounting serves external decision makers such as stockholder, suppliers, banks and
government agencies. Management accounting serves internal decision makers, such as top
executives, department heads, college deans, hospital administrators and people at other
management levels within the organization. A common source of financial information used by
investors and others outside the company is the annual report. It’s prepared by management and
potential investors to inform them about the company’s past performance and future prospects. In
addition to the financial statements, annual report usually include:
1. Letter from the corporate management.
2. A discussion and analysis by management of recent economic events.
3. Footnotes that explain many elements of the financial statements in more detail.
4. The report of the independent registered public accounting firm (auditors).
5. Statements by both management and auditors on the company’s internal controls
6. Other corporate information.
The balance sheet
The balance sheet also called the statement of financial position, shows the financial status of an
organization at a particular instant in time. The resources and claims form the balance sheet
equation.
Assets = liabilities + owners’ equity
Assets – liabilities = owners’ equity
Assets are economic resources that the company expects to help generate future cash inflows or
reduce or prevent future cash outflows. (cash, inventories & equipment). Liabilities are economic
obligations of the organization to outsiders or claims against its assets by outsiders (dept to bank, a
loan, notes payable). Owners’ equity is the owner’s claim on the organization’s assets.
, Example:
Assets Liabilities & owner’s equity
Cash $500.000 Liabilities (note payable) $100.000
Capital (owner’s equity) $400.000
Total assets $500.000 Total Liabilities & owners’ equity $500.000
Balance sheet transactions
Accountants record every transaction entered into by an entity. The total assets always the total
liabilities plus owners’ equity. They must maintain the equality of the balance sheet equation for
every transaction.
Transaction analysis
Accountants record transactions in an organization’s accounts. An account is a summary record of
the changes in a particular asset, liability or owners’ equity and the account balance is the total of
all entries to the account to date. After recording all the transactions for some period, the
accountant will summarize these transactions into financial statements that managers, investors
and others use when making decisions.
CHAPTER 1
The nature of accounting
Accounting organizes and summarizes economic information so decision makers can use it.
Accountants present this information in reports called financial statements. An organization’s
accounting system is the series of steps it uses to record financial data and convert them into
informative financial statements.
Economic Analyzed Accountants Summarized Financial Communicated Information
event & recorded Analysis & info statements to users
recording
Financial and management accounting
Financial accounting serves external decision makers such as stockholder, suppliers, banks and
government agencies. Management accounting serves internal decision makers, such as top
executives, department heads, college deans, hospital administrators and people at other
management levels within the organization. A common source of financial information used by
investors and others outside the company is the annual report. It’s prepared by management and
potential investors to inform them about the company’s past performance and future prospects. In
addition to the financial statements, annual report usually include:
1. Letter from the corporate management.
2. A discussion and analysis by management of recent economic events.
3. Footnotes that explain many elements of the financial statements in more detail.
4. The report of the independent registered public accounting firm (auditors).
5. Statements by both management and auditors on the company’s internal controls
6. Other corporate information.
The balance sheet
The balance sheet also called the statement of financial position, shows the financial status of an
organization at a particular instant in time. The resources and claims form the balance sheet
equation.
Assets = liabilities + owners’ equity
Assets – liabilities = owners’ equity
Assets are economic resources that the company expects to help generate future cash inflows or
reduce or prevent future cash outflows. (cash, inventories & equipment). Liabilities are economic
obligations of the organization to outsiders or claims against its assets by outsiders (dept to bank, a
loan, notes payable). Owners’ equity is the owner’s claim on the organization’s assets.
, Example:
Assets Liabilities & owner’s equity
Cash $500.000 Liabilities (note payable) $100.000
Capital (owner’s equity) $400.000
Total assets $500.000 Total Liabilities & owners’ equity $500.000
Balance sheet transactions
Accountants record every transaction entered into by an entity. The total assets always the total
liabilities plus owners’ equity. They must maintain the equality of the balance sheet equation for
every transaction.
Transaction analysis
Accountants record transactions in an organization’s accounts. An account is a summary record of
the changes in a particular asset, liability or owners’ equity and the account balance is the total of
all entries to the account to date. After recording all the transactions for some period, the
accountant will summarize these transactions into financial statements that managers, investors
and others use when making decisions.
