Introduction to Accounting

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Introduction to Accounting

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Accounting is the system of recording financial transactions with both numbers and text in the form of financial statements. It provides an essential tool for billing customers, keeping track of assets and liabilities (debts), determining profitability, and tracking the flow of cash. The system is largely self-regulated and designed for the users of financial information, who are referred to as stakeholders: business owners, lenders, employees, managers, customers, and others. Stakeholders utilize financial statements to help make business, lending, and investment decisions.

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Accounting has several specialized fields and roles. Private (internal) accounting generally refers to accountants who work within a single business entity. Small business accountants may assume general roles which require preparing the records (bookkeeping) and performing bank reconciliations. Accounting professionals are generally divided into three fields: tax, audit, and advisory. The tax field focuses on federal, state, and local tax filings. Audit roles test the validity of financial statements and internal controls. Advisory services perform general financial consulting.  Public accounting firms have several different clients, whereas private accounting refers to working for one specific business entity.

 

Accounts

There are five different types of accounts:  asset, liability, equity, revenue, and expense. Each account type includes sub-accounts to record transaction details. For example, cash assets may include several different cash and savings accounts.

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  • Expense accounts: Selling, general, and administrative, interest, repairs, depreciation (non-cash), amortization (non-cash) and others

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Financial Statements

Financial statements are the end results of the completed accounting record. They include the balance sheet, income statement, statement of shareholders’ equity, statement of cash flows, and notes to the financial statements. The information provides predictive value, feedback, and timely data to stakeholders.

  • The balance sheet reports business assets, liabilities, and equity up to a specific time period

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  • The income statement reports the profit and loss activity for a specified period of time

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  • The statement of shareholders’ equity reports detail of investment received and prior earnings

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  • The statement of cash flows reports the ins and outs of cash in three categories: Operating, investing, and financing

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  • The notes to the financial statements disclose information that cannot be understood with the financial statements alone

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Debits and Credits