Accounts - Introduction

What is Accounting?

Accounting is the art of identifying, recording, and reporting financial information relating to a particular entity to interested parties. The main way of communicating this financial information is through financial statements, such as the balance sheet and income statement. There are two main streams of accounting:

1. Managerial accountingThis form of accounting provides accounting information to help managers make decisions to manage the business. Financial information is used by managers to set budgets, analyze the costs of the different products, control and monitor work in progress, and so on.
2. Financial accounting
   This form of accounting is used to prepare accounting information for people outside the organization or not involved in the day-to-day running of the company. Here we are mainly concerned with financial accounting.
   

Users of accounting system
1. Shareholder / Investors
2. Tax authorities
3. Lenders to company
4. Financial analysts
5. Suppliers 
6. Employees

 Organization forms

Elements of financial statements

The 3 components of financial statements are :
1. Assets
2. Equity
3. Liability

Assets
Asset is economic resource which the entity owns or controls.
These can be fixed ( like property, plant ) with life of more than 1 year
                                      OR
current ( like cash, inventory, accounts )

Liability 
Liability is obligation of enterprise which will result in outflow of economic resources in future.
It can be current (like accounts payable or bank overdrafts ) or long term(like bank loan) with life more than year.

Equity or net assets
Equity = Assets - liability

Some other terms
Revenue or income represents the income that a business generates
Expenses - costs associated with running the business like wages, electricity bills
Gain - Increase in equity arising from the transactions outside of an entity's normal operating.
Loss - Opposite of gain

Organizational Forms and the Business Goal

Financial accounting is important within all types of business organizations, the major forms of which are introduced here:

	A sole proprietorship is a business owned by an individual or family. The assets and liabilities of the business are the personal assets and liabilities of the proprietor.
	A partnership is a business owned by two or more individuals called partners. Unless otherwise specified, the assets and liabilities of the business are the personal assets and liabilities of the partners.
	A company is a legal entity independent of its owners – unlike a sole proprietor or partnership. It can sue and be sued. It can own assets, borrow, and contract on its own behalf. A company is owned by its shareholders. Shareholders elect a board of directors who employ managers to run the business.

In sole proprietorships and partnerships, the owners and managers of the business are generally the same people. In companies, the owners (that is, the shareholders) do not necessarily manage the business. This separation of ownership and control, while having many advantages such as knowledge and experience in particular areas, often creates a conflict of interest. Owners or shareholders pay managers to run the business in their best interests. The manager's prime responsibility is to make decisions in the best interests of maximizing shareholder wealth, but managers may sometimes neglect their obligations to the shareholders.