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Clay tokens were used in Mesopotamia 7,000 years ago to keep track of
inventories of crops or livestock. This allowed them to make some simple
comparisons of their farm produce on yearly basis thereby enabling them to
take some decisions to increase the produce.
BOOKKEEPING:
All accounting starts with bookkeeping because information needs to
be gathered systematically initially for any decision making to take
place.
If bookkeeping were to cease to exist, then societal gridlock is bound to
happen.
Bookkeeping is about collecting information because once we have the
information, we can then organize it and make some decisions based
on it.
Bookkeeping is the system for collecting information systematically
and in an organized manner.
FINANCIAL ACCOUNTING:
Summary information of a business or organization provided to
outsiders.
The key external users of financial accounting data are lenders and
investors i.e. people who provide capital for your business.
Lenders want to know:
Will the loan be repaid by assessing:
Current income
Existing obligations
Existing assets
Investors want to know:
Is the business profitable now?
What is the potential for the future?
Other external users of financial accounting data are suppliers (to
know whether the company will be able to repay them), customers
(to know whether the company will exist long enough to meet their
needs), employees (to know whether the company is making profits
or running in losses), competitors (to know the strengths and
weaknesses of the company), government agencies (to know
whether the company is in compliance with the law), politicians (to
make a point about the trend in the companys progress) and the
press (to provide background information about the company).
When you apply for a loan, they ask you to verify how much your
income was in the last year or the last several years as well to verify
your assets (house, investments, etc.) and obligations (any other
loans, credit card loans, etc.). Basically you are being asked for
personal financial statements so that they can decide whether you will
be able to repay the loan. They are more able to forecast repayment
capability and probability. Providing personal financial statements
reduces the lender uncertainty. It provides the borrower an opportunity
to reveal their creditworthiness.
As of right now:
What do you have?
How much do you owe?
At a point in time
Income Statement
How much did you make:
This week?
This month?
This year?
For a period of time
INCOME STATEMENT
The income statement contains 2 items revenues and
expenses.
The Income Equation:
REVENUES EXPENSES = NET INCOME
Revenues are the amount of assets created from the sale of goods
or services.
Expenses are the amount of assets consumed in generating
revenues.
Net Income is the overall measure of a companys economic
performance during a period.
Earnings per Share (EPS) is defined as the net income divided by
the total number of shares of stock of a company.
OPERATING
ACTIVITIES
INVESTING
ACTIVITIES
CASH
INFLOW
(RECEIPTS
)
Selling goods
Providing
services
Selling
buildings
Selling land
Borrowing money
Receiving
investments
CASH
OUTFLOW
(PAYMENT
S)
Purchasing
buildings
Purchasing
land
Repaying loans
Distributions
(dividends) to
owners
Paying
Paying
Paying
Paying
wages
utilities
taxes
interest
FINANCING
ACTIVITIES
Operating Activities are the things that you do every single day
i.e. your operations. They are the routine events done daily.
Investing Activities are the activities done to invest in the
productive capacity of the business. These activities are carried out
occasionally and not on a daily basis.
Financing Activities are the activities done to get the cash to do
what the business requires to be done. These are also carried out
occasionally.
MANAGERIAL ACCOUNTING:
Detailed accounting data used internally for making daily decisions.
Good managerial accounting is a competitive tool.
We can analyse the managerial accounting data by:
1. Store, by country, by region
2. Department
3. Specific item
4. Physical location in the store
5. Season/climate
6. Day of the week
7. Time of the day
8. National/local ad campaigns
9. Payment method
10.Demographics of buyer
1.
2.
3.
4.
5.
6.
7.
INCOME TAXES
Accounting done to satisfy our legal obligations.
1.
2.
3.