2. Introduction
Accounting - a process of identifying,
recording, summarizing, and reporting
economic information to decision makers in
the form of financial statements
Financial accounting - focuses on the
specific needs of decision makers external to
the organization, such as stockholders,
suppliers, banks, and government agencies
3. Financial and Management Accounting
Accountants answer these primary questions
with three major financial statements.
Balance Sheet - financial picture on a given
day
Income Statement - performance over a
given period
Statement of Cash Flows - performance over
a given period
4. The Balance Sheet
Sections of the balance sheet:
Assets - resources of the firm that are expected to
increase or cause future cash flows (everything the
firm owns)
Liabilities - obligations of the firm to outsiders or
claims against its assets by outsiders (debts of the
firm)
Owners’ Equity - the residual interest in, or
remaining claims against, the firm’s assets after
deducting liabilities (rights of the owners)
5. The Balance Sheet
The balance sheet equation:
Assets = Liabilities + Owners’ Equity
or
Owners’ Equity = Assets - Liabilities
6. The Balance Sheet
HAMILTON COMPANY
Balance Sheet
December 31, 1997
Assets Liabilities
Current assets: Current liabilities:
Cash $ 4,525 Accounts payable $ 9,800
Accounts receivable 2,040 Wages payable
3,765
Total current assets $ 6,565 Total liabilities $13,565
Plant assets:
Land $ 9,755
Equipment 6,500 Owners’ Equity
Total plant assets 16,255 Hamilton, capital 9,255
Total liabilities and
Total assets $22,820 Owners’ equity $22,820
============= =============
7. Types of Ownership
Management by the owners:
Sole proprietorship - The owner is an active
manager in day-to-day operation of the
business.
Partnership - Partners are usually active
managers in day-to-day operations of the
business.
Corporation - Shareholders usually do not
participate in the day-to-day operations of the
business.
