Introduction to Accounting

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Definition of Accounting

• Accounting is a language of business.

• As the American Accounting Association: “ accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.”

• An accountant is an information specialist.

Who use accounting

• Nonprofit and profit Organizations• Federal government bureau• Companies• Small businesses

Accounting terms

• SEC – security exchange commission• GAAP – generally accepted accounting

principles• CPA – certified public accounting

Financial statements

• Cash flow statement• Balance sheet• P/L statement• Owner’s Equity statement

Friends CompanyIncome Statement

For the Period Ended 20X6

Revenue (i.e., assets increase) 3,000

Expenses (i.e., assets decrease) (1,000)

Net Income (i.e., change in net assets) $ 2,000

Friends CompanyBalance Sheet

Period Ended 20X6Assets $8,500

Total Assets 8,500

Liabilities 2,000

Equity

Contributed Capital 5,000

Retained Earnings 1,500

Total Equity 6,500

Total Liability and Equity (Claims) 8,500

Friends CompanyStatement of Cash Flows

For the Period Ended 20X6Cash Flows from Operating Activities Cash Receipts from Revenue $3,000 Cash Payments for Expenses (1,000)Net Cash Flow from Operating Activities 2,000

Cash Flows from Investing Activities 0

Cash Flows from Financing Activities Cash Receipts from Borrowing 2,000 Cash Receipts from Capital Acquisitions 5,000 Cash Payments for Distributions (500)Net Cash Flow from Financing Activities 6,500

Net Increase in Cash 8,500Plus: Beginning Cash Balance 0

Ending Cash Balance $8,500

Summary

• Accounting is a standard language of measuring financial performance by a variety of organizations. Accounting follows GAAP, which are guidelines for measuring and presenting financial information on a fair, consistent, and straightforward basis.