Introduction To Business: Understanding Accounting and Financial Information

Introduction to Business
Understanding Accounting and

Financial Information
Learning Objectives
✔ Demonstrate the role that accounting and financial
information play for a business and its
stakeholders.
✔ List the steps in the accounting cycle, distinguish
between accounting and bookkeeping, and explain
how computers are used in accounting.
✔ Explain how the major financial statements differ.
✔ Demonstrate the application of ratio analysis in
reporting financial information.
✔ Identify the different disciplines within the
accounting profession.
The Role of Accounting Information
1. Small and large businesses often survive or fail according to
how well they handle financial procedures.
2. Financial management is the heartbeat of competitive
businesses, and accounting information helps keep the
heartbeat stable.
3. Accounting, often called the language of business, allows us
to report financial information about nonprofit
organizations such as churches, schools, hospitals,
fraternities, and government agencies.
4. It’s almost impossible to understand business operations
without being able to read, understand, and analyze
accounting reports and financial statements.
What Is Accounting?
• Accounting is 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.
• The method we use to record and summarize
accounting data into reports is an accounting system.
• A major purpose of accounting is to help managers
make well-informed decisions.
The Accounting Cycle
• The accounting cycle is a six-step procedure that
results in the preparation and analysis of the major
financial statements .
• It relies on the work of both a bookkeeper and an
accountant.
• Bookkeeping, the recording of business
transactions, is a basic part of financial reporting.
• Accountants classify and summarize financial data
provided by bookkeepers, and then interpret the
data and report the information to management.
The Accounting Cycle
Journal: The record book or computer program where
accounting data are first entered.
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.
Understanding Key Financial
Statements
Financial statement: A summary of all the transactions that
have occurred over a particular period.
The key financial statements of a business are:
1. The balance sheet, which reports the firm’s financial
condition on a specific date.
2. The income statement, which summarizes revenues, cost of
goods sold, and expenses (including taxes) for a specific
period and highlights the total profit or loss the firm
experienced during that period.
3. The statement of cash flows, which provides a summary of
money coming into and going out of the firm. It tracks a
company’s cash receipts and cash payments.
The Fundamental Accounting Equation
Assets = Liabilities + Owners’ equity
For example, suppose you have $50,000 in cash and
decide to use that money to open a small coffee shop.
Your business has assets of $50,000 and no debts. The
accounting equation would look like this:
Assets = Liabilities + Owners’ equity
$50,000 = $0 + $50,000
Now you have $30,000 of additional cash, but you
also have a debt (liability) of $30,000.
Then $80,000 = $30,000 + $50,000
How does financial accounting differ
from managerial accounting?
Managerial accounting provides information and
analyses to managers within the firm to assist
them in decision making.
Financial accounting provides information and
analyses to external users of data such as
creditors and lenders

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Understanding Accounting and

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