Accounting is considered to be the language of business, and how company’s communicate to various stakeholders how the business is operating, it’s financial outcomes through record keeping, and key business measures that provide a past, present, and at times future view of the company’s performance.
Managerial accounting is distinguished from Financial accounting based upon who the information is ultimately provided for, internal (Managerial) verses external (Financial) stakeholders. Managerial accounting reports are developed for internal stakeholders, usually managers and staff, as well as, executive leadership. Financial accounting reports are developed for Investors and Creditors, and at times, various regulatory agencies or auditors.
Basic Accounting Equation:
Assets = Liabilities + Stockholder Equity or ( A = L + SE)
Assets – Liabilities = Stockholder Equity or (A – L = SE)
When you read Stockholder Equity, in any private or public for profit business there is at least one stockholder, which could be the single owner that is common in private business, or many stockholders that are common to publicly traded business, usually on a national or international exchange.
To determine the profitability of a business, Revenues verses Expenses are evaluated. If a company has more Revenue than Expenses, the company is considered profitable. If the company is profitable, had a net profit, then it can either retain the profits or distribute them as dividends to shareholders.
Dividends are not defined as Expenses – because it is not a cost of doing business, it is the earnings amongst the owners of the business. Review Illustration 1-4 Business Activities and Their Measurements for a quick summary of terms and equations.
Four basic Financial Statements: (remember this is for external stakeholders: Creditors and Investors)
- Income statement
- Statement of Stockholder Equity
- Balance Sheet
- Statement of Cash Flow
Income Statement: Revenues – Expenses = Net Income (set Illustration 1-5: Income Statement for Eagle Golf Academy)
Statement of Stockholder Equity: Stockholder Equity = Common Stock + Retained Earnings
Balance Sheet: Assets = Liabilities + Stockholder Equity (see Illustration 1-7: Balance Sheet for Eagle Golf Course)
Statement of Cash Flows: Operating, Investing, Financing cash flows: Change in Cash = Operating + Investing + Financing cash flows
Financial Accounting Standards:
GAAP vs FASB vs ISAB
Generally Accepted Accounting Principles vs Financial Accounting Principles vs International Accounting Standards Board
Why is having established standards, procedures, and definitions so important to the financial reporting?
