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Chapter 2 : Accounting - Introduction

Accounting: Introduction arrow_upward

  • Accounting is about communicating financial information about a business to shareholders and managers.
  • It has two main divisions:
    • Financial Accounting-This includes revenues, earnings, assets and liability; its core components being:
    • Balance Sheet: Reports on a company's assets, liabilities, and ownership equity at a given point of time.
    • Income Statement or Profit and Loss Statement (P&L): Reports on a company's income, expenses, and profits over a period of time.
    • Management Accounting–This includes cost, budgeting, and net present value. It is mainly prepared for internal purposes.

    What Accounting is all about? arrow_upward

  • Accounting is about 5 simple things:
    • Assets
    • Liabilities
    • Expenses
    • Revenue
    • Owners’ Equity


  • The value of which can be expressed in monetary terms that can be used to generate revenue through the sale of goods and services.
    • Examples: Cash, accounts receivable, inventory, notes receivable, prepaid expenses, land, buildings, equipment, furniture, and fixtures.


  • Obligations an organization owes to someone else.
    • Examples: Notes payable, accounts payable, accrued liabilities, long-term liabilities (bonds).


  • The cost necessary to produce revenue.
  • There are two types of expenses:
    • Direct Expenses
    • Indirect Expenses 


  • Income that a company receives from its normal business activities.

  • Owners’ Equity

  • Owners’ interest in the company.
    • Examples: Common stock, retained earnings, revenues, expenses.

    Types of Expenditures arrow_upward


  • Payments to suppliers.
  • Refunds to customers.
  • Financing

  • Payment of dividends or capital to owners.
  • Repayment of creditors.
  • Investing

  • Purchase of assets.
  • Amounts invested in other entities (debt or equity).

  • Fundamental Accounting Equation arrow_upward

  • In the GAAP (Generally accepted accounting principles) framework there must be a continuous equilibrium between assets on one side and the total of liabilities and equity on the other side.
  • This is represented by the fundamental equation of accounting:
  • Assets = Liabilities + Owners’ Equity

  • The recording of every transaction must keep this equation in balance, for which double entry bookkeeping is employed.

  • Double Entry Accounting arrow_upward

  • All journal entries have two sides:
    • Debit (increase) and
    • Credit (decrease)

  • For every journal entry, the total debits must equal the total credits.
  • This ensures that the fundamental accounting equation (Assets = Liabilities + Owner’s Equality) is always in balance.

  • Typical Accounting Cycle arrow_upward

  • Transaction or event occurs.
  • Recorded in the journal using a Journal Entry (Decisive step).
  • Journal is posted to the Ledger.
  • Ledger accounts are totalled.
  • Financial statements are prepared. It includes:
    • Income Statement
    • Statement of Owner's Equity
    • Balance Sheet
    • Statement of Cash Flow

    Remember arrow_upward

    Type of Account















    Receivables arrow_upward

    Payables arrow_upward

    Balance Sheet – A Permanent Statement arrow_upward

  • It shows net worth of a business.
  • The amounts presented on the balance sheet are aggregated from the entity’s beginning to the balance sheet date.
  • Provides following:
    • List of Assets
    • List of Liabilities and Owners’ Equity

    Income Statement – A Temporary Statement arrow_upward

  • It is a company's financial statement that indicates how the revenue is transformed into the net income.
  • An income statement encompasses of expenses, revenues, net income or net loss.
  • Its accounts are temporary accounts.
  • They accumulate information for a period and then are reset to zero to begin tracking information for the next period.
  • The amounts presented in the income statement are aggregated from the beginning of the period to the end of the period only.

  • Thank You from Kimavi arrow_upward

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