Introduction to

Accounting
Objectives:
• Define accounting
• Describe the nature of accounting
• Explain the functions of accounting in business
• Narrate the History& Origin of accounting
The language of business
• It will help you succeed in business

• It is the means that business information is

communicated to the stakeholders in the
business
Accounting
• The art of recording, classifying, and
summarizing in a significant manner and in
terms of money, transactions and events which
are, in part at least of financial character, and
interpreting the result thereof.
Accounting
• Art and Science
• Art – it requires the use of skills and creative
judgment. One has to be trained in this
discipline to be able to perform accounting
functions
• Science – it is a body of knowledge. However,
accounting is not an exact science since the
rules and principles are constantly changing
Accounting
• It involves Interconnected phases
• Recording pertains to writing down or keeping
records of business transactions.
• Classifying involves grouping similar items that
have been recorded.
• Once they are classified, information is
summarized into reports called financial
statements
• It is also concerned with transactions and events
having financial character
Accounting
• Business Transactions are expressed
in terms of Money
• Interpreting results
How accounting can help you
• Help you prepare a budget and keep on target.

• Realize how much cash you have and if there is

enough to pay bills.

• Uncover places where costs can be cut.

Nature of Accounting
• The basic features of accounting are as follows:
• 1. Accounting is a process:
• It follows definite steps like collection of data recording,
classification summarization, finalization and reporting.
• 2. Accounting is an art:
• It is a behavioral knowledge involving certain creativity and skill
that may help us to attain some specific objectives.
• 3. Accounting is means and not an end:
• Accounting finds out the financial results and position of an entity
and the same time, it communicates this information to its
users.
Nature of Accounting

• 4. Accounting deals with financial information and

transactions;
• Accounting records the financial transactions and date after
classifying the same and finalizes their result for a definite period
for conveying them to their users.
• 5. Accounting is an information system:
• Accounting is recognized and characterized as a storehouse of
information. As a service function, it collects processes and
communicates financial information of any entity.
Functions of Accounting in
Business

• 1.Record Keeping
• 2.Protecting of Properties
• 3.Communication of Results
• 4.Meeting Legal Requirements
History& Origin of accounting

• 2,000 to 3,300 B.C.

• evolved around the time societies started trading with
each other. Evidence of accounting has been found on
clay tablets from Egypt and Mesopotamia
• In the 15th century, an Italian mathematician and writer,
Luca Pacioli, created a system of basic accounting and
recorded it in a simple textbook.
• Father of Accounting
• Double Entry System
• Recognized and generally accepted system all over the world and
still being widely used.
Who’s who in accounting
• Bookkeepers-record each transaction

• Accountants-prepare financial statements

• Auditors-review the company’s books and look

for errors and discrepancies (could be internal or
external)

• Controller-in charge of the accounting

department
Who’s who in accounting

• CPAs-certified public accountants

• Typically work for an accounting firm called

public accounting

• Once a year come in and do an audit of the

books of the company and do the related tax
returns

• CPAs also work for private companies

Four financial statements
• Balance sheet
• Income statement (profit/loss)
• Statement of cash flows
• Statement of changes in equity
Elements of financial statements
• The information in the financial statements is
organized into 10 categories called elements.

• The elements include: assets, liabilities, equity,

contributed capital, revenue, expenses,
distributions, net income, gains and losses.
Accounts
• The elements are divided into classifications
called accounts.

• For instance there are different kinds of assets.

A business would have a cash account like a
checking account and they might also own a
building.
Chart of accounts
• Every company has a chart of accounts, sort of like a table of
contents in a book.

• Each account is assigned a number

• Usually assets start with 1, liabilities 2, stockholder’s equity 3,

income 4, cost of goods sold 5, other expenses 6.
General ledger
• Think of it like a book that keeps track of all the
accounts

• It is a chronological record of all the business

transactions

• Sometimes it is called the company’s books

• Everything in the general ledger flows to the

financial statements
Balance sheet
• Highlights the relative strength of a company at a
point in time.

• Terms related to the balance sheet: assets,

liabilities, owner’s equity.
Assets
• Assets are things you own or resources a business owns.

• The assets of a business belong to its creditors and

investors.

• Tangible assets-this you can touch like machinery,

buildings, land, computers, etc.

• Intangible assets-things you cannot tough such as right to

patents, rights to payments from customers, copyrights
or trademarks.
Liabilities
• Things you owe, future obligations of the
business

• Creditor claims

• Examples include a bank loan or car loan, or

buying supplies for your business on credit
Equity
• Rights of stockholders or their claim on assets

• There are two types of equity

• Common stock is issued by corporations to
finance their operations
• Retained earnings which is the portion of
earned assets kept in the business
Accounting equation
• This equation is how the balance sheet is
completed.

• Assets=Claims

• Assets=Liabilities + Equity

• Assets=Liabilities + Common stock + Retained

earnings
Accounting equation
• The equation always needs to balance on both
sides of the equal sign.

• This is what people mean when they say balance

the books.
Example of accounting equation
• ABC Company has assets of $20,000 and liabilities of $5,000.
How much is stockholder’s equity?

• A=L+OE
• 20,000=5,000+?
• 20,000-5,000=15,000
Income statement
• Also called the P&L (profit and loss statement)

• Shows your revenues and expenses over a period of time

(month, year)

• Revenue is income from the sale of goods

• If revenue is more than expenses, you have net income

• If expenses are more than revenue, you have a net loss
Income statement
• Terms used on the income statement:

• Revenue or sales
• Cost of goods sold or Cost of merchandise sold
• Gross profit
• Operating expenses
• Net income or net loss
Statement of changes in Stockholder’s
Equity
• Sometimes called statement of changes in owner’s equity

• Explains the effects of transactions on stockholder’s equity

during the accounting period.
Statement of changes in Stockholder’s
Equity
• Starts with beginning common stock and adds any additional
shares of stock issued.

• Then it takes the beginning retained earnings and adds on net

income (subtracts net loss)

• Then it subtracts any dividends paid to shareholders

Cash flow statement
• This explains how a company obtained and used cash during
the accounting period.

• Receipts of cash are called cash inflows.

• Payments of cash are called cash outflows.

Cash flow statement
• There are three sections to the cash flow statement:
operating, investing and financing.

• Operating section is first. Operating activities include

receiving cash from revenue and paying cash for expenses.
Cash flow statement
• Investing section includes paying cash to buy productive assets
(like machinery or equipment) or receiving cash when you sell
productive assets.

• Financing section includes receiving cash from owners or

paying cash to owners (dividends) It can also include
borrowing cash from the bank or repaying the cash.
Cash flow statement
• It tells you whether your cash increased or decreased and
why.
How the financial statements are
interrelated
• The income statement is prepared first
• The income from this statement flows to the
statement of changes in stockholder’s equity

• The stockholders equity total and common stock

totals flow to the balance sheet

• The cash from the balance sheet flows to the

statement of cash flows