Financial and Cost Accounting, Taxes and Economic

From the previous post we already learn about the meaning of accounting. Accounting as a communicating tool informs accounting information to who needs the data. Usually we will use financial statement as a communicatng tools.

From wikipedia we can know that Financial statements provide an overview of a business' financial condition in both short and long term. There are four basic financial statements:

1. Balance sheet: also referred to as statement of financial position or condition, reports on a company's assets, liabilities, and net equity as of a given point in time.
2. Income statement: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time.
3. Statement of retained earnings: explains the changes in a company's retained earnings over the reporting period.
4. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. [F.12-14]

Actually who needs the financial statement? In this case we can divide into 2 groups, INTERNAL USERS and EXTERNAL USERS. Who are they?

1.Internal Users:
a.Owners and managers: they need financial statement to make some decisions relate with the continued of their business.It will be also a report for the stockholder.
b.Employee: they need the report in order knowing about the compensation, promotion and rankings that have to be paid to them.

2.External Users:
a.Prospective Investors: they need the financial statement to assess the viability of investing in a business thus providing them with the basis in making investment decisions.
b.Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.
c.Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.
d.Media and the general public are also interested in financial statements for a variety of reasons.

Sources: Wikipedia & THE FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS


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On the previous post we can know that the basic of modern accounting is on the double entry book keeping system. This system was first described by the Italian mathematician Luca Pacioli, in his Summa de arithmetica, geometrica, proportioni et proportionalità (Venice, 1494).By using this system we will record each transaction in at least two accounts., at least one account being debited and at least one account being credited with the total debits of the transaction equal to the total credits.

Basically item in accounts are classified into 5 broad groups, there are:
1. Asset
2. Liability
3. Equity
4. Revenue
5. Expense
From that group we can get an accounting equation, the basic of accounting equation:

assets = liabilities + equity

Revenue minus expense means profit or loss, the next, profit or loss well be added to the component of equity so basic equation can be further expanded becomes:

assets = liabilities + equity + (revenue − expenses)
assets + expenses = liability + equity + revenue

From that equation we can know the normal balance for each group. Assets and expenses (on the left side of the equation) have a normal balance of DEBIT. Liability, equity and revenue (on the right side of the equation) have a normal balance of CREDIT.
The following table summarizes how debits and credits affect the different elements of the accounts.
Debit/credit

** Assets :
-->Debit : Increase
-->Credit : Decrease
** Expenses :
-->Debit : Increase
-->Credit : Decrease
** Liabilities :
-->Debit : Decrease
-->Credit : Increase
** Shareholder Equity :
-->Debit : Decrease
-->Credit : Increase
** Revenue :
-->Debit : Decrease
-->Credit : Increase

Sources: Wikipedia

By seeing that equation and knowing the normal balance for each account, it can make easier for us to record every transaction we have. The process of recording transactions usually called as a JOURNAL.

Here, we will take an example:
** Purchase a machine (by CREDIT), we will journal as follow:
Dr. Machine (fixed asset account) is increased
Cr. Account payable (liabilities account) is increased

** Paying sallary to employee, we will journal as follow:
Dr. Wages (expense account) is increased
Cr. Cash (asset account) is decreased

After a certain period, the columns in each journal are each totalled to give a summary for the period and then transferred to their respective accounts in the ledger. The process of transferring is called POSTING. On a general ledger, debits are recorded on the left side and credits on the right side for each account.



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Accounting is one important point when we have a business. So, now let’s learn what is accounting.
The American Accounting Association defines accounting as follows:
"The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.
From the definition above, let’s analyze each word to know more about accounting process.

** Identifying: the first process here is identifying, actually identifying what? Identifying means we will identify the transactions that we have so we can classify the transactions into suitable account. It is done based on a system of accounting known as double-entry bookkeeping or we can say as a journal.

** Measuring: The "measurement" of accounting information is not a straight-forward process. it involves making judgements about the value of assets owned by a business or liabilities owed by a business. it is also about accurately measuring how much profit or loss has been made by a business in a particular period. As we will see, the measurement of accounting information often requires subjective judgement to come to a conclusion. (TUTOR)

** Communicating: this words means accounting has a purpose as a communicating tool to inform accounting information to who needs the data. Usually we will use “financial statement” as a communicating tool. From wikipedia we can know that financial statement usually used are balance sheet, income statement, capital statement and cash flow statement. At the next chapter we will try to discuss more about financial statement.

The basic of accounting is on the double entry bookeeping system. Using this system means we will entry one transaction into two accounts, one on the debit side, and the others on the credit side. By using thi system it can make easier for us to analyse when we have a mistake.

Accounting as an art which is based on double entry book keeping sytem already known in Italy since 1495, when Luca Pacioli (1445-1517), who also known as Friar (Romo) Luca dal Bargo, published his book in Venice, the first english book which is published in London by Jogn Gouge or Gough in 1543.


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