Chapter 17 Accounting Accounting the recording classifying summarizing and interpreting of financial events and transactions in an organization to provide management and other interested parties the financial information they need to make good decisions about its operation Accounting system method used to record and summarize accounting data into reports Managerial accounting provides information and analysis to managers inside the organization to assist them in decision making managerial accounting is concerned with measuring and reporting costs of production marketing and other functions preparing budgets checking whether or not units are staying within their budgets and designing strategies to minimize taxes Certified management accountant CMA professional accountant who has met certain educational and experience requirements passed a qualifying exam and been certified by the Institute of Certified Management Accountants Financial accounting differs from managerial accounting in that the financial information and analyses it generates are for people primarily outside the organization Annual report a yearly statement of the financial condition progress and expectations of an organization Private accountant accountant who works for a single firm government agency or nonprofit organization Public accountant accountant who provides accounting services to individuals or businesses on a fee basis Certified public accountant CPA accountant who passes a series of examinations established by the American Institute of Certified Public Accountants AICPA The independent Financial Accounting Standards Board FASB defines the generally accepted accounting principles GAAP that accountants must follow Auditing the job of reviewing and evaluating the information used to prepare a company s financial statements Independent audit an evaluation and unbiased opinion about the accuracy of a company s financial statements Certified internal auditor CIA an accountant who has a bachelor s degree and two years of experience in internal auditing and who has passed an exam administered by the Institute of Internal Auditors Tax accountant an accountant trained in tax law and responsible for preparing tax returns or developing tax strategies Government and not for profit accounting accounting system for organizations whose purpose is not generating a profit but serving ratepayers taxpayers and others according to a duly approved budget Accounting cycle a six step procedure that results in the preparation and analysis of the major financial statements 1 Analyze source documents 2 Record transactions in journal 3 Transfer post journal entries to ledger 4 Prepare financial statements balance sheet income statement statement of cash flow 5 Analyze financial statements Bookkeeping the recording of business transactions Journal the record book or computer program where accounting data are first entered Ledger specialized accounting books that arrange the transactions by homogenous groups Computers can record and analyze data and provide financial reports Software can continuously analyze and test accounting systems to be sure they are functioning correctly Computers can help decision making by providing appropriate information but they cannot themselves make good financial decisions Accounting applications and creativity are still human functions Double entry bookkeeping the practice of writing every business transaction in two places Ledger a specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place Trial balance a summary of all the financial data in the account ledgers that ensures the figures are correct and balanced Financial statement a summary of all the transactions that have occurred over a particular period 1 Balance sheet repots the firm s financial condition on a specific date 2 Income statement summarizes revenues cost of goods and expenses including taxes for a specific period and highlights the total profit or loss the firm experienced during that period 3 Statement of cash flow provides a summary of money coming into and going out of the firm that tracks a company s cash receipts and cash payments Fundamental accounting equation assets liabilities owners equity this is the basis for the balance sheet Balance sheet financial statement that reports a firm s financial condition at a specific time and is composed of three major accounts assets liabilities and owners equity the assets are equal to or balanced with the liabilities and owners equity Assets economic resources things of value owned by a firm Liquidity the ease with which an asset can be converted into cash Accounts receivable an amount of money owed to the firm that it expects to receive within one year 1 Current assets items that can or will be converted into cash within one year 2 Fixed assets assets that are relatively permanent such as land buildings and equipment Intangible assets long term assets patents trademarks copyrights that have no real 3 physical form but do have value Liabilities what the business owes to others debts 1 Accounts payable current liabilities are bills the company owes to others for merchandise or services purchased on credit but not yet paid for 2 Notes payable short term or long term liabilities that a business promises to repay by a 3 Bonds payable long term liabilities that represent money lent to the firm that must be Owners equity the amount of the business that belongs to the owners minus any liabilities owned by the business 1 Equity the value of things you own assets the amount of money you owe to others 2 Stockholders equity the value of what stockholders own in a firm minus liabilities 3 Capital account sole proprietors and partners liabilities bank loans 4 Retained earnings the accumulated earnings from a firm s profitable operations that were reinvested in the business and not paid out to stockholders in dividends Income statement the financial statement that shows a firm s profit after costs expenses and taxes it summarizes all of the resources that have come into the firm revenue all the resources that have left the firm and the resulting net income certain date paid back liabilities Net income or not loss revenue left over after all costs and expenses including taxes are paid Revenue monetary value of what a firm received for
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