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Accounting Summary
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AccountingAccounting is information to
Make decisions as a firm, e.g., Prices, Investments, Strategy, take-overs
Make decisions as investors, as banks
Determine tax payments
Inform people having an interest in the firm
Fulfill duties to society (e.g. pay taxes)
Summarize all kind of actions, decisions, results, transactions into figures to steer
the business and inform stakeholders
Auditing: The examination of financial statements by a certified public accountant in order
to express an opinion as to how accurately the financial statements present the company’s
results and financial position
Relevance: Financial information that is capable of making a difference in a decision
Economic entity assumption: An assumption that requires that the activities of the entity be
kept separate and distinct from the activities of its owner and all other economic entities.
Proprietorship: A business owned by one person
Generally accepted accounting principles (GAAP): Common standards that indicate how to
report economic events
Financial Accounting: external financial reporting and bookkeeping (for stakeholders)
Management Accounting: internal information for decision-making, performance
evaluation, and control
, Balance sheet (Moment overview): overview of the firm’s situation at a point in time.
Assets: what the firm owns; what it has done with the funds it received
Liabilities: what the firm owes; where the funds came from. Split into equity (funds from
owners) and other liabilities
Common stock: Issued in exchange for the owners’ investment paid in to corporation
Compound entry: A journal entry that involves three or more accounts
Double-entry system: A system that records in appropriate accounts the dual effect of each
transaction
Ledger: The entire group of accounts maintained by a company
Resources (Assets) = Equity (Shareholders) + Obligations (Liabilities)
Profit and loss statement: the results of a company over a period of time
“Benefits” (revenues, gains, income) – “costs” (expenses, losses)
Cash flow statement: the flow of money into and out of the company over a period of time
SO changes in other assets and liabilities correct for the fact that not all value changes are
identical to cash flow changes!
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