April 25, 2016

Accounting: The Language of Business - Review Notes

Review of chapter of Horngren (Introduction to Financial Accounting) to be posted

Accounting is the information system that measures business activity, processes the data into reports,
and communicates the results to decision makers. Accounting is “the language of business.” The better you understand the language of business, the better you can manage your own business.

A key product of accounting is a set of reports called financial statements. Financial statements report on a business in monetary terms.

We can divide accounting into two fields—financial accounting and managerial accounting.
Financial accounting provides information for external decision makers, such as outside investors and lenders. Financial accounting provides data for outsiders.

Managerial accounting focuses on information for internal decision makers, such as the company’s managers. Managerial accounting provides data for insiders.

A business can be organized as one of the following:
● Proprietorship
● Partnership
● Corporation
● Limited-liability partnership (LLP) and limited-liability company (LLC)
● Not-for-profit

Accounts are maintained for each of them.

Accounting Concepts and Principles
The Entity Concept
The Faithful Representation Principle
The Cost Principle
The Going-Concern Concept
The Stable Monetary Unit Concept

The Accounting Equation
The basic tool of accounting is the accounting equation. It measures the resources of
a business and the claims to those resources.

Definition of  Accounting

Accounting is the process of analyzing, recording, classifying, summarizing and communicating the results of the economic events of an organization.  The economic events must be measurable in dollars, and are called transactions.

Transaction is an economic event that is a measured in dollars. Accounting is based on actual transactions, not opinions or desires. A transaction is any event that affects the financial position of the business and can be measured reliably. Transactions affect what the company owns, owes, or its net worth.

The Accounting Cycle

1.  Analyze each transaction (Decide which account is to debited and which account is to be credited)
2.  Record each transaction in a journal (ordered by date).
3.  Transfer each transaction to the accounts affected in the ledger.
     (The ledger is a set of accounts ordered by account number.)
4.  Summarize the transactions in the form of statements to help in taking decisions.

5. The overall performance of the organization is summarized in financial statements of the organization
     a.  Income Statement:  Shows the net income (profit) of the company.
     b.  Owner's Equity Statement:  Shows the owner's claim in the business.
     c.  Balance Sheet:  Shows the financial position of the company.
     d.  Cash Flow Statement:  Shows where cash came from and where it went during the period.

Similar statements can be prepared for various profit centers of the organization also.

Introduction to Financial Accounting
Professor Alexander Sannella

Rutgers Digital Accounting Web

Review notes - Very good detailed notes

Presentation slides


Related chapter



Foundation lecture for accounting course - PPT

Book chapter from Pearson

Financial, Cost and Management Accounting - Review Notes List

Updated 25 Apr 2016,  12 Apr 2016,
8 Dec 2011


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