Module 1 UNDERSTANDING FINANCIAL STATEMENTS MODULE 1 UNDERSTANDING FINANCIAL STATEMENTS Accounting ReviewPower of Accounting Accounting is a system that Identifies, Measures，Records, Communicates information that is Relevant, Reliable, Consistent, Comparable to help users make better decisions Business Profit Revenues: Amounts earned from selling products or services-Expenses: Costs incurred with revenues =Profit: Amounts earned from revenues less expenses incurred Loss occurs when expenses are more than revenuesFocus of Accounting Identifying Economic Events Recording Economic EventsReporting and Analyzing Economic Events Accounting and Technology Reduces time, effort and cost of record-keeping Improves clerical accuracy Changes the way we store, process and summarize large masses of data Forms of Organization Business :Sole Proprietorship , Partnership Corporation Non-business Users of Accounting Information Internal Users Managers ,Officers ,Internal Auditors Sales Managers ,Budget Officers ControllerExternal Users Lenders ,Shareholders ,Government ,Labour Unions ,External Auditors ,CustomersFinancial Accounting and Managerial AccountingFinancial accounting is the area of accounting aimed at serving external users3.Its primary objective is to provide external reports called financial statements to help users analyze an organizations activities.Managerial accounting is the area of accounting aimed at serving the decision-making needs of internal users.It provides special purpose reports customize to meet the information needs of internal users.general accounting, cost accounting, budgeting,internal auditing, management consultingOpportunities in Practice Financial Statement Preparation Statement Analysis Auditing Regulatory Consulting Planning Criminal Investigation (forensic accounting)Managerial General Accounting Cost Accounting Budgeting Internal Auditing Management -consulting servicesTaxation Preparation Planning Regulatory Investigations ConsultingAccounting-related Lenders Consultants Analysts Traders Managers Directors Underwriters Planners AppraisersFinancial Statements Financial statements report on the financial performance and condition of an organization.There are four major financial statementsIncome StatementBalance SheetStatement of Owners EquityStatement of Cash FlowsA balance sheet reports on an organizations financial position at a point in timeThe income statement , statement of owners equity and statement of cash flows report on performance over a period of timeIncome StatementStatement of Owners EquityBalance SheetFundamental Principles of Accounting Generally Accepted Accounting Principles (GAAP)1.Business Entity Principle A business is accounted for separately from its owner or owners.2. Objectivity Principle Financial statement information is supported by independent, unbiased evidence. 3. Cost Principle Financial statements are based on actual costs incurred in business transactions. 4.Going-Concern Principle A business continues operating instead of being closed or sold. 5.Monetary Unit Principle Express transactions and events in monetary units. 6.Revenue Recognition Principle Revenue is recognized when earned, not just when cash has been received.Accounting Equation The accounting equation must remain in balance after each transaction.Assets=Liabilities + EquityThe Account The account is a detailed record of increases and decreases in specific assets, liabilities and equities. Asset Accounts Assets are resources controlled by an organization that have current and future benefits. cash, accounts receivable, notes receivable, office supplies, store supplies, prepaid insurance, equipment, buildings, landLiabilities Accounts Liabilities are obligation to transfer assets or provide services to other entities. accounts payable, notes payable, unearned revenues, other liabilitiesEquity Accounts owners capital, owners withdrawal, revenues, expenses The T-Account The T-account is used as a simple tool for illustrating the balance in a given account . Account Title (Left Side) Debit (Right Side) Credit Balance of an Account An account balance is the difference between the increases and decreases in an account Total increases Total decreases =BalanceDebits and Credits Within every individual account, debits and credits have opposite effects. Therefore, in an account where a debit is an increase, a credit is a decrease and vice versa. Double-Entry Accounting Double-entry accounting means every transaction affects and is recorded in at least two accounts.The total amount debited must equal the total amount credited for each transaction.The system