ch_01accounting - the language of business

8/12/2019 Ch_01Accounting - The Language of Business

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2006 Prentice Hall Business Publishing Introduction to Financial Accounting, 9/e Horngren/Sundem/Elliott/Philbrick

ACCOUNTING:

The Language

of Business

CHAPTER

1


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DO YOU KNOW THIS GUY?

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ACCOUNTING IS THE LANGUAGE

OF BUSINESS

BUSINESS

RESULT-----COMMUNICATION-----

LANGUAGE-------

ACCOUNTING

PROFIT

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OF BUSINESS

LINKAGE

ENHANCE YOUR PREVIOUS KNOWLEDGE

ABOUT BUSINESS AND BUSINESS RESULTS

WHOLE ACCOUNTING WHICH WE ARE

GOING TO LEARN DEALS WITH HOW TO

COMMUNICATE BUSINESS RESULTS TOSTAKEHOLDERS

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OF BUSINESS

OUTCOME o f THIS SESSION

WHAT IS ACCOUNTING; &

WHAT IS THE PURPOSE OF ACCOUNTING

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OF BUSINESS

STRUCTURE OF THIS SESSION

50:50

Active participation is sought

PARTICIPATION MEANS

Contributing innovative and effective ideas

towards the current topicAnswering various questions

Following the mentors instructions

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7/29 2006 Prentice Hall Business Publishing Introduction to Financial Accounting, 9/e Horngren/Sundem/Elliott/Philbrick

ACCOUNTING IS THE LANGUAGE OF

BUSINESS

WIIFM

o THIS SESSION WILL BUILD YOUR BASE

TOWARDS DEVELOPING AN ACUTEUNDERSTANDING OF ACCOUNTING

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What is Accounting?

Accounting is the PROCESSof :

Identifying

Recording

Summarizing, and

Reporting

economic/financial information for stakeholders

Accountants present this information in reports

called FINANCIAL STATEMENTS



What is Accounting?

IDENTIFYING

Businesstransaction

Relevant

Can bedenominated in

monetary terms CASH/CREDIT

RECORDING

Businesstransactions

In the books ofaccounts

SUMMARIZING

Accounting period

In the form ofFINANCIALSTATEMENTS

Incomestatement

Balance sheet

Cash flowstatement

REPORTING

Conveyed inwritten form toSTAKEHOLDERS

Users ofFinancial

Statements

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What is the Purpose of Accounting?

TO FACILITATE DECISION MAKING

Economic/ financial decisions

Help in making Investment and credit decisions

Assess the amount, timing and uncertainty of futurecash flows etc



Stakeholders/Users of Financial

Statements

PRIMARY STAKEHOLDERS

INVESTORS

Profit-----current financial statements

Past performance------ past f/s + comparison

with the industry

Security of their investment

Financial position----------cash or dividend




Statements

CREDITORS/SUPPLIERS

Repaying capability

Future business




Statements

SECONDARY STAKEHOLDERS

CUSTOMERS/DEBTORS

Quality of product

Fulfilling warranty obligations

Going concern

Business with the company

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Statements

EMPLOYEES/ TRADE UNIONS

Pay raise

Employment security

GOVERNMENT

Economy

Number of businesses in the industry---their

performance Investment incentives

Tax authorities

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Statements

PUBLIC

Local communities----employment---public

participation programs

Local environment----environment friendly---Corporate Social Responsibility (CSR)

ACTIVITY:

o IDENTIFY THE ABOVE STAKEHOLDERS ASINTERNAL AND EXTERNAL

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TYPES OF BUSINESS?

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TYPES OF BUSINESS?

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TYPES OF BUSINESSES

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SOLE

PROPRIETORSHIP PARTNERSHIP

CORPORATION

Simple to start Little complex than S.P More complex

All in one- sole owner BoDs, Managers,

shareholders

Everything shared

Lack of capital- small

is O.K

Larger than S.P Largest

Unlimited liability Limited liability- LLPs Limited liability

Continuity of business Depends on Partnership

DeedNo Effect

Transfer of ownership Procedural Very easy



THE BALANCE SHEET

BALANCE SHEET (also called the Statement of

Financial Position) shows the financial status of

a company at a particular instant in time

ELEMENTS OF BALANCE SHEET:

ASSETS

LIABILITIES

OWNERS EQUITY



ASSETS

ASSETS are RESOURCESthat are CONTROLLED by thecompany as a result of past event and from which FUTUREECONOMIC BENEFITS are expected to flow into the business.

Economic Benefits will NOT expire during a single period

FEATURES OF ASSET:

CONTROL

FUTURE ECONOMIC BENEFIT INFLOW

LONG TERM

Through Ownership

Company will CONTINUE to get economic benefits in future



ASSETS

EXAMPLES OF ASSETS:

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Cash

building

Furniture & Fixtures

Equipment



LIABILITIES

CLAIMS ON COMPANYS RESORUCES

LIABILITIESare PRESENT OBLIGATIONS as a result of

past event that will result in OUTFLOWof economic

benefits

OUTFLOW of economic benefits

FEATURES :



LIABILITIES

Examples of Liabilities:

Creditors-Accounts Payable

Notes Payable

Bank Loans

Verbal promise to pay

Written promise to pay

Money borrowed from bank



OWNERS EQUITY

RESIDUAL INTEREST:

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Whatever is LEFT after deducting LIABILITIES from ASSETS

FEATURES :

Owners claim on the business resources----because

lenders have First Claim

Assets - Liabilities


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2006 Prentice Hall Business Publishing Introduction to Financial Accounting, 9/e Horngren/Sundem/Elliott/Philbrick 26 of 43

Accounting Differences Among

Legal Forms

Proprietorships and partnerships

Owners equities are labeled capital

Owners equities are recorded in the capital account

Corporations Owners equities are labeled stockholders equity or

shareholders equity. Total capital investment iscalled paid-in capital

Owners equity is recorded in two parts: Common stock at par value

Paid-in capital in excess of par value


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The Meaning of Par Value

Par value (or stated value)the dollar amountprinted on the stock certificate

Paid-in capital in excess of par value (or

additional paid-in capital)the differencebetween the total amount the company receivesfor the stock and the par value

Common stock is recorded at the par value

Common shareholders are owners who have aresidual ownership in the corporation throughthe purchase of common stock


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Stockholders and the

Board of Directors

Shareholders elect a board of directors to look

out for their interests

Members of a board often include CEOs and

presidents of other corporations; universitypresidents and professors; attorneys; and

community representatives

The chairman of the board may also be the topmanager, the chief executive officer (CEO)


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Stockholders and the

Board of Directors

The boards duty is to ensure that managers act

in the interest of shareholders

When boards do their duty in monitoring

management, the corporate form of organizationis effective

Board of Directors ManagersStockholders

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