The Nature of Accounting

 ASSETS = things a company owns.

 LIABILITIES = what the company owes to

others;

 OWNER’S EQUITY = what remains after

liabilities are deducted from assets
Two Main Accounting Concepts
1. Accounting Equation

2. Double-Entry Bookkeeping

Both were developed centuries ago but

remain central to the accounting process.
Accounting Equation

 Assets – Liabilities = Owner’s Equity

Assets = Liabilities + Owner’s Equity

Two Main Financial Statements
 Balance Sheet – shows the current financial
position of a company;

 Profit and Loss Account (income statement

AmE) – shows the results of operations
(performance) over a period of time
Two other financial statements
3. Cash flow statement
 describes how much cash was used in corporate
operating, investment, and financing activities over a
period of time.
 The Cash Flow Statement shows how the company is
paying for its operations and future growth, by
detailing the "flow" of cash between the company and
the outside world; positive numbers represent cash
flowing in, negative numbers represent cash flowing
out.
4. Statement of changes in shareholder equity
- reconciles the difference between the equity at the
two different points in time.
Balance Sheet
 Assets are divided into:
◦ fixed (not expected to be converted into cash and
comprise property, land and equipment)
◦ current (include cash and other items - stocks, bonds,
amounts due from customers, services paid for but
not yet used - that will or can become cash within the
following year
◦ intangible (include the costs of organizing the
business, patents on a process or invention, copyrights
on written material, trademarks, goodwill)
 Liabilities are divided into:

◦ current (obligations that will have to

be met within a year of the date of
the balance sheet)

◦ long-term (obligations that fall due a

year or more after the date of the
balance sheet)
Profit and Loss Account
 it summarizes:
◦ all revenues (or sales), the amounts that
have been or are to be received from
customers for goods and services delivered
to them,
◦ and all expenses, the costs that have arisen
in generating revenues.
◦ when expenses are subtracted from
revenues, we obtain the actual profit or loss
of a company – the BOTTOM LINE
Auditing
 Auditing, a related but separate discipline, has two
sub-disciplines:
◦ External auditing - the process whereby an
independent auditor examines an organization's
financial statements and accounting records in order
to express an opinion as to the truth and fairness of
the statements and the accountant's adherence to
Generally Accepted Accounting Principles (GAAP).
◦ Internal auditing - an examination in which
management, and not the external public, is the main
beneficiary. It is carried out usually by auditors
employed by the company.
The Big 4 (sometimes written as the
Big Four)
 a group of international accountancy and
professional services firms that handles the
vast majority of audits for publicly traded
companies as well as many private
companies.
 The members of the Big 4 are:
 PricewaterhouseCoopers
 Deloitte Touche Tohmatsu
 Ernst & Young
 KPMG.
THANK YOU
FOR
WATCHING
