Financial Accounting

Accounting - It is the process of identifying, recording and summarizing economic data about the organization and reporting it to decision makers.

Financial Accounting - It serves external decision makers such as Stockholders, suppliers, banks, and government agencies

Management Accounting – It serves internal decision makers, such as top executives, department heads, college deans, and other people at management levels within the organization.

Questions on Financial situation about the company:

A) What is the financial picture of the organization on a given day?

B) How well did the company do during a given time period.

Three statements that are very important for decision makers that are prepared by accountant are:

a) Balance Sheet

b) Income Statement

c) Statement of Cash Flows.

Annual Report – A report prepared by corporate management to be distributed among current investors and future prospects. It contains overview of company along with future goals. It also contains all the information about financial situation of the company.

Form 10K – A document submitted with SEC that contains the financial statements of the corporation.

Balance Sheet = Statement of Financial Position = Financial Situation of a company at a particular instant in time. Balance sheet MUST balance both sides (Assets and Liabilities + Owner Equity). If the balance sheet doesn’t match on both sides, there is a mistake.

Balance Sheet Equation

Assets = Liabilities + Owner’s Equity

Owner’s Equity (OE) = Assets – Liabilities

Another Version-

Assets = Liabilities + Owner’s Equity

Assets = Liabilities + Paid in Capital + Retained Earnings

Assets = Liabilities + Paid in Capital + Revenues (Total Sales) – Expenses (Total Sacrifices)

Assets - Economic Resources that either help future Cash Inflow (Adding) or help reduce outflow of CASH

Liabilities - Economic Obligations to outsiders or claims against its assets by outsiders.

Paying Dividends is not an Expense since paying dividends it the distribution of wealth to its owners.

Owner’s Equity - Owner’s CLAIM on organization’s assets or total assets less total liabilities. Remember ( OE is the owner’s claim that can be made after deducting all the liabilities from the Company’s Assets.

Notes Payable - Promissory note(s) that are evidence of a debt and state the terms of repayment.

Entity - an organization or part of the organization that stands apart from other organizations and individuals as a separate unit.

Transaction - an economic event that that affects the financial situation of the entity an can be recorded reliably by the accountant.

Long-lived Asset – an asset that the company expects to provide service for more than 1 year.