Chapter 1

Accounting in Action

What is Accounting? An information system that identifies,

records and communicates economic events Identify: select activities that are evidence of

economic activity Record: keep a chronological diary of events

measured in dollars and cents Communicate: create standardized financial

statements

Internal Users Plan, organize and run a business

e.g. marketing managers, production supervisors, finance directors, company officers

Questions asked by internal users:1. Is cash sufficient to pay bills? (finance dept.)2. What is the cost of manufacturing each unit of product?

(production dept.)3. Can we afford to give raises this year? (HR dept.)4. Which product line is the most profitable? (marketing

dept.)

External Users Work for other organizations but have an

interest in the financial position of the companyE.g. creditors, government, regulatory agencies, customers

Questions asked by external users:1. Is the company earning satisfactory income?2. How does the company compare in size and

profitability with competitors?3. Will the company be able to pay its debts as

they come due?

Accounting1. Includes bookkeeping2. Also includes much moreBookkeeping1. Involves only the recording of

economic events2. Is just one part of accounting

Bookkeeping vs. Accounting

The Accounting Profession Public accountants offer their expertise

to the general public Private accountants are employees of

individual companies and are involved in a number of activities, including cost and tax accounting, systems, and internal auditing

Not-for-profit accounting includes reporting and control for government units, foundations, hospitals, labour unions, colleges/universities, and charities

Assets = Liabilities + Owner’s Equity

The Basic Accounting Equation

Definitions Assets are resources owned by a business Liabilities are claims against assets (debts

or obligations) Owner’s equity is the owner’s claim on

the assets of the business

Definitions Continued Drawings are withdrawals of cash or other

assets by the owner for personal use; they decrease owner’s equity

Revenues are the increases in owner’s equity resulting from business activities entered into for the purposes of earning income

Expenses are the decreases in owner’s equity that result from operating the business

Financial Statements Financial statements are prepared from

summarized accounting data: Income statement: presents revenues,

expenses, net income or net loss for a specific period of time

Statement of Changes in Owner’s Equity: summarizes the changes in owner’s equity for a specific period of time

Balance Sheet: reports assets, liabilities, and owner’s equity at a specific date

Cash Flow Statement: summarizes cash inflows and outflows for a period of time