Basic Accounting Concepts

Chapter 17 introduces the subject of managerial accounting. Managerial accounting relates to reporting internal to an organization, and is far less structured than the rules-based system applicable to financial (external) reporting. Managerial accounting broadly entails many activities that relate to planning, directing, and controlling. This framework supports management decisions and drives the creation of business value.

The chapter provides a high-level introduction to planning activities related to strategy, positioning, and budgets. This is followed by discussions of key directing activities that pertain to costing, production, and analysis. Controlling activities necessary to manage a successful organization are also introduced. Each of the topics covered in the chapter opening is elaborated upon in subsequent chapters.

This chapter also identifies key terms and concepts applicable to managerial accounting. Product costs consist of direct materials, direct labor, and manufacturing overhead. Great care is given to defining these important concepts. Other costs are generally considered to be period costs. Manufacturers have unique measurement and reporting issues, including categorization of inventory into raw material, work in process, and finished goods. The chapter illustrates how these costs flow through the reporting framework.

Learn Accounting Podcast #18 | Adjustments | Accruals and prepayments Ledgers | Prof.

Very brief review of financial accounting: accounting equation, matching principle, and revenue recognition principle; with a short discussion on the differences in financial and managerial accounting.

Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account.

Liquidity is another useful determinant of credit worthiness. Liquidity refers to the availability of cash to the business. Obviously, lenders are concerned whether borrowers will have sufficient cash to repay loans. Liquidity is mainly a function of profitability. Ordinarily, the more profitable the business, the more cash available. However, liquidity is not simply a function of profitability, and firms of comparable profitability do not necessarily have comparable liquidity.

Financial statements are a set of numeric records that summarises the financial activities of a business and so describes the financial position and performance of a business.

Discussion of the Revenue Recognition and Matching Principles

Bank reconciliations play an important part in the internal cash controls of a business. For this reason they should be done at regular intervals. Broadly speaking, there are four key steps in the bank reconciliation process: (1) gather the information (2) identify the discrepancies (3) update the business accounting records (4) prepare a bank reconciliation statement.

In this article, you will learn and familiarize yourself with the accounting principles and accounting concepts relevant in performing the accounting procedures.

The Income Statement reports on the financial performance of a business for a given accounting period. Typical accounting periods are monthly, quarterly and annually. The Income Statement summarizes the revenues earned and subtracts the expenses incurred in earning that revenue to calculate the resulting net profit or loss for the business for a given accounting period. The Income Statement may also be referred to as the 'Profit & Loss Statement', 'P&L' , 'Statement of Financial Performance' , 'Revenue Statement' , 'Earnings Statement', 'Operating statement' or 'Statement of Operations'.

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Financial statements are used by stakeholders to assess the financial position and performance of an enterprise. These stakeholders may be internal or external to the enterprise. The information provided by the financial statements helps supports their decisions and actions in relation to the enterprise.

Discussion of the types and behavior of costs. Specifically, how variable and fixed costs behave in total compared with how they behave on a per unit basis.

Your goals for this “analysis and cash flows” chapter are to learn about:

Tools for financial statement analysis, Evaluating cash flow and the statement of cash flows, The direct approach to preparing a statement of cash flows, The indirect approach to presenting operating activities, Using a worksheet to prepare a statement of cash flows.

Learning financial accounting will help you better understand the primary function of accounting, which are the recording, summarizing and reporting of business transactions to stakeholders.