What is accounting?
Accounting is an information science that is used to collect and organize financial data for organizations and individuals.
Information Science – It has to do with collecting, processing and analyzing information.
But what type of information? Financial. Accounting is about money. it is quantitative and measures money.
It’s one of those things you’ll learn best by doing
Used by Organizations… Every firm needs to be able to organize the financial information of its business.
A Firm has to know…
Has to know..
- How much you were able to sell
- Cost for the product that you sold
- How much money it has in the bank
- need to know how much comes in and out or they will be in deep trouble
Accounting helps you use the past in order to take action in the present and change the futureWhy do we need accounting?
What types of accounting are there?
Bookkeeping – collect information. Responsible for all information collected and taking care of information. Making sure financial information as been gathered properly.
Financial Accounting – Prepared for external stakeholders. Be able to read it without having inside information. Financial statement are prepared for externals like banks, how much sales did you have, company profitable, and how was it financed? and so on.. Accounting principles are what this area follows.
Managerial Accounting – Strategic information available to insiders. It is not defined as accounting principles. Looks into topics like pricing, competition, marginality, budgeting, and so on. Do not want to show outsiders or they will gain a counter plan. (Top Secret)
Tax Accounting – Calculation of income taxes. This is the fourth type. It is a very technical field, that varies for every county in the world. Preparing how much you will pay.
This is where it all starts
The collection of information
Try to imagine. you wake up and all the bookkeeping information in the world are gone.. They are no records of you paying your electricity bills and your power is gone.. They didn’t know they were out of stock and all your food in grocery is gone.. Now you have no power or food. You then go to the bank and says sorry we can’t find your records in our system…
Modern society can’t run without bookkeepingThink about GE:
> it has over 3,000 employees
>170+ countries of operations
>Operates in business sectors like appliances, lighting, aviation
> Financial services, etc
Can you imagine how complex its operations are
Do you think they can monitor its businesses without the proper bookkeeping system in place?
Is it going to be able to understand whether its operation in a given country are profitable or not
Whether there is a product not profitable and should be discontinued
Recording every single transaction that takes place in the firm is paramount at this level of complexityIt is proper bookkeeping ensures all necessary information has been recorded and is ready to use.
Bookkeeping is at the foundation of all Accounting
2. Financial Accounting
is the set of financial reports that is prepared for people outside of the organization.
- How many sales the company made this year
- How many sales the company had last year
- They show how profitable the companies business was
- What cost of costs it sustained
- What company owns
- What it owes
- How much cash the company had available at the time of preparation
We can conclude that financial accounting allows outsiders to make a reasonable judgement about it’s company’s business.
Why is this important?
Why should a company go through all the trouble in order to prepare such reports?Think about a firm that does not prepare financial reports.
- What would have been different in that case?
- Is there a bank that would be willing to lend money without knowing how you were going to repay the loan.
- Investor willing to put up their money without knowing anything without the company’s business.
The answer is no. Why they prepare their financial reports enables them to communicate to those who are interested
Revenues of GE Revenues north of $148bn and thousands of investors being a public company.. located not only in the United States but all over the world.
How is it they monitor the company’s business and decide whether to hold or sell their shares?
Financial Reporting and financial statements to monitor company’s performance.
Financial Accounting is fundamental!
How did the company perform
- How did the company perform throughout the period under consideration
- Did it product a profit or loss? Wonder if I made money.
- Typically prepared annual
- Some large companies did it quarterly
- Revenue growth – find important trends as growth of sales
- Gross profits on revenues
- The reason it is called a balance sheet because Assets = Liabilities + Shareholders Equity
- What does a company owe and own on a certain date.
- It shows the assets that the business controls, the liabilities that it owes and the amount of equity that belongs to equity holders.
- How much cash did the company make during the period under consideration
- Where did it come from
- Give us an idea of the movements of cash
- liquidity of the firm’s operations
- Find it in a companies annual reports
P&L Income Statement
- Revenue – net sales – represents an inflow of economic resources
- Usually day to day sales: Customers buying goods that the firm sells.
- Can be other sources outside of core – renting some of their real estate or selling goods that they typically don’t sell. The account is Other Revenue.
- Net Sales + Other revenue = Total Revenue
- Ex: Selling milk and Cheese: Net Sales
- Hi Angela, Costco wants to buy another 10,000 milk cartons Rent would be registered as Other Revenue because Core Business activities and Income of Other Revenue
- Expenses – fuel its sales, outflow of economic resources. Delivers goods to clients. Sustain certain costs.
- 1. Cost of Goods
- 2. Selling, General and Administrative
- 3. Depreciation and Amortization
- 4. Interest Expenses.
Cost of Goods Sold
Necessary to produce the goods that the firm sells. These are expenses that are directly attributed to its products. We buy raw milk from local producers, process it and then sell it to its customers.
Total Revenue – Cost of Goods Sold = Gross Profit