CH - 01accounting - The Language of Business

ACCOUNTING: The Language of Business
CHAPTER
2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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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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 TO STAKEHOLDERS
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OUTCOME of THIS SESSION

WHAT IS ACCOUNTING; & WHAT IS THE PURPOSE OF ACCOUNTING
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STRUCTURE OF THIS SESSION 50:50 Active participation is sought
PARTICIPATION MEANS
Contributing innovative and effective ideas towards the current topic
Answering various questions

Following the mentors instructions
2006 Prentice Hall Business Publishing Introduction to Financial Accounting, 9/e Horngren/Sundem/Elliott/Philbrick 6 of 43
WIIFM
o THIS SESSION WILL BUILD YOUR BASE TOWARDS DEVELOPING AN ACUTE UNDERSTANDING OF ACCOUNTING
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What is Accounting?
Accounting is the PROCESS of : Identifying Recording
Summarizing, and
Reporting economic/financial information for stakeholders Accountants present this information in reports called FINANCIAL STATEMENTS
What is Accounting?
IDENTIFYING
Business transaction Relevant Can be denominated in monetary terms CASH/CREDIT
RECORDING Business transactions In the books of accounts
SUMMARIZING Accounting period In the form of FINANCIAL STATEMENTS Income statement Balance sheet Cash flow statement
REPORTING Conveyed in written form to STAKEHOLDERS Users of Financial 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 future cash flows etc
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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
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CREDITORS/SUPPLIERS
Repaying capability
Future business
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SECONDARY STAKEHOLDERS CUSTOMERS/DEBTORS Quality of product
Fulfilling warranty obligations

Going concern Business with the company
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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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PUBLIC
Local communities----employment---public participation programs Local environment----environment friendly--Corporate Social Responsibility (CSR) ACTIVITY: o IDENTIFY THE ABOVE STAKEHOLDERS AS INTERNAL AND EXTERNAL
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TYPES OF BUSINESS?
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TYPES OF BUSINESS?
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TYPES OF BUSINESSES
SOLE PROPRIETORSHIP Simple to start CORPORATION
PARTNERSHIP
Little complex than S.P More complex BoDs, Managers, shareholders Largest Limited liability
All in one- sole owner Everything shared Lack of capital- small is O.K Unlimited liability Larger than S.P Limited liability- LLPs
Continuity of business Depends on Partnership No Effect Deed Transfer of ownership Procedural

2006 Prentice Hall Business Publishing Introduction to Financial Accounting, 9/e
Very easy
Horngren/Sundem/Elliott/Philbrick 19 of 43
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
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ASSETS
ASSETS are RESOURCES that are CONTROLLED by the company as a result of past event and from which FUTURE ECONOMIC BENEFITS are expected to flow into the business. LONG TERM Economic Benefits will NOT expire during a single period FEATURES OF ASSET: Through Ownership CONTROL
Company will CONTINUE to get economic benefits in future
FUTURE ECONOMIC BENEFIT INFLOW
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ASSETS
EXAMPLES OF ASSETS:
Cash building Furniture & Fixtures Equipment
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LIABILITIES
LIABILITIES are PRESENT OBLIGATIONS as a result of past event that will result in OUTFLOW of economic benefits
FEATURES : CLAIMS ON COMPANYS RESORUCES OUTFLOW of economic benefits
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LIABILITIES
Examples of Liabilities:
Verbal promise to pay Creditors-Accounts Payable Written promise to pay Notes Payable
Money borrowed from bank

Bank Loans
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OWNERS EQUITY
RESIDUAL INTEREST:
Assets - Liabilities
Whatever is LEFT after deducting LIABILITIES from ASSETS FEATURES :
Owners claim on the business resources----because lenders have First Claim
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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 is called 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 amount printed on the stock certificate Paid-in capital in excess of par value (or additional paid-in capital) the difference between the total amount the company receives for the stock and the par value Common stock is recorded at the par value Common shareholders are owners who have a residual ownership in the corporation through the purchase of common stock
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; university presidents and professors; attorneys; and community representatives The chairman of the board may also be the top manager, 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 organization is effective
Stockholders
Board of Directors
Managers
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ACCOUNTING: The Language of Business

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

DO YOU KNOW THIS GUY?

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

ACCOUNTING IS THE LANGUAGE OF BUSINESS

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

ACCOUNTING IS THE LANGUAGE OF BUSINESS

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

ACCOUNTING IS THE LANGUAGE OF BUSINESS

OUTCOME of THIS SESSION

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

ACCOUNTING IS THE LANGUAGE OF BUSINESS

Answering various questions

ACCOUNTING IS THE LANGUAGE OF BUSINESS

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

RECORDING Business transactions In the books of accounts

REPORTING Conveyed in written form to STAKEHOLDERS Users of Financial Statements

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

What is the Purpose of Accounting?

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

Stakeholders/Users of Financial Statements

Past performance------ past f/s + comparison with the industry

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

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

Stakeholders/Users of Financial Statements

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

Stakeholders/Users of Financial Statements

Fulfilling warranty obligations

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

Stakeholders/Users of Financial Statements

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

Stakeholders/Users of Financial Statements

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

Continuity of business Depends on Partnership No Effect Deed Transfer of ownership Procedural

THE BALANCE SHEET

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

FUTURE ECONOMIC BENEFIT INFLOW

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

2006 Prentice Hall Business Publishing

Introduction to Financial Accounting, 9/e

FEATURES : CLAIMS ON COMPANYS RESORUCES OUTFLOW of economic benefits

2006 Prentice Hall Business Publishing