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
1. balance sheet – shows the current
financial position of a company

2. 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)
 balance sheet
• 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.