Fundamentals of Financial Reporting and Accounting

The Systematic Process of Accounting

Accounting is the systematic process of identifying (looking for financial information of the business), recording (writing down collected information), summarizing (classifying into accounts), analyzing (understanding financial information), interpreting (being aware of the impact), and reporting (communicating information) financial information in the form of financial statements to the decision-makers.

Functions of the Accounting Department

The functions and responsibilities of the accounting department include:

• Payroll: Calculating salaries, wages, checks, taxes, and employee benefits.
• Procurements and Inventory: Recording goods sold, purchases, products for sale, and liabilities.
• Cash Collectors: Identifying and recording cash receipts, deposits on accounts, and balances.
• Cash Payments: Ensuring payments are made on time and verified.
• Property Accounting: Managing property taxes.

Types and Users of Accounting Information

• Tax Accounting: Focused on government taxes and government rules; it is subject to change and represents a small part of the field.
• Managerial Accounting: Used inside the business; there are no strict rules as it adapts to meet the user's needs.
• Financial Accounting: Used outside the business for multi-purpose reports following specific rules.
  • Direct Users: Those strongly affected by financial information, such as investors.
  • Indirect Users: Those not directly affected, such as customers.

Common Types of Accounting Events

• Revenue Events: Selling goods or services and collecting payments.
• Expenditure Events: Buying and paying for goods and services.
• HR/Payroll Events: Hiring and paying employees.
• Financing Events: Obtaining funds to run the organization.

Classification of Assets

Current Assets: Cash (cash on hand, bank accounts), marketable securities (stocks, bonds, certificates of deposit), receivables (accounts receivable, notes receivable, interest receivable), inventory (raw materials, manufacturing supplies, semi-finished goods, finished goods), supplies (stationery and other supplies), and prepaid expenses (prepaid rent, prepaid taxes, prepaid insurance).

Fixed Assets: Property, building and plant, furniture and equipment, vehicles, machinery, and equipment.

Intangible Assets: Patents, copyrights, and trademarks.

Understanding Liabilities and Owner's Equity

Current Liabilities: Financial (bank loans, short-term loans), securities issued (bonds issued, other securities issued), payables (accounts payable, notes payable, interest payable), and accrued expenses (accrued rents, accrued taxes, accrued wages).

Long-Term Liabilities: Mortgages, bank loans for vehicles, and bank loans for machinery and equipment.

Owner's Equity

Owner's Equity includes: capital/common stock, revenue (current earnings/fees earned), retained earnings, expenses, and drawings/dividends.

Structure of Financial Statements

Income Statement:

• Gross Sales: Sales Income - Sales Discount / Sales Returns
• Cost of Goods Sold (COGS): Beginning Inventory + Purchase = Goods Available for Sale - Ending Inventory = COGS
• Gross Profit: Net Sales - COGS
• Operating Expenses: Selling Expenses + Administrative/General Expenses
• Net Income for Operations: Gross Profit - Total Expenses
• Other Expenses for Income: Net Income ± Other Expenses/Income = Net Income

Statement of Stockholders' Equity:

Initial Capital (Dec 1st): Net Income - Dividends/Drawings = Increase or Decrease in Capital. This results in the Ending Capital (Dec 31st).

Balance Sheet:

Includes the name of the company, type of statement, and date. It lists Assets (Current, Fixed, Intangible) to find the Total Assets, Liabilities (Current, Long-Term) to find Total Liabilities, and Owner's Equity (OE) to find the Total OE.