chapter 1

• accounting can be defined as "the process of identifying, measuring and communicating economic information to permit informed judgements and business decisions by users of the information".
• the success or failure of a company is measured in financial terms and is recorded and reported using accounting information
• there are two main categories of accounting: financial accounting and management accounting
• financial accounting is suited to provide general information about the business to external users
• management accounting or managerial accounting provides information primarly to support internal management's decision making
• accounting data are used by internal users (marketing, management, human resources, finance) and external users (creditors and investors)
• users want the following corporate information: financial performance (ability to utilise its assets, business goals) and financial position (financial resources and structure and measure of liquidity)
• the main goal of accounting is to measure, record and classify every transaction related to business activity and this requires a systematic approach
• the accounting process is defined by the following steps: identify the business transaction, measure these transactions in monetary terms, record classify and summarize the data in the accounting books, communicate the information in accounting reports called "financial statements", interpret and analyse the information provided in the reports in order to support one's decision-making process
• recording and classifying business transactions in a systematic way according to the double-entry method is called bookeeping
• transactions involve an exchange of what the company gives and what the company receives from the markets
• company and other organizations can buy and sell "on credit" which means they do not pay right away for what they purchase but agree to pay in the future the supplier and they don't collect right away the amounts related to what they have sold but agree with the client to collect it later: accounts payable (money due to suppliers) and accounts receivable (money customers owe to the company)
• if we focus on the term of payment of the exchange, we are dealing with the financial view of the transaction (related to the financial flows), if we focus on the goods/services exchanged (purchased or sold) we are dealing with the economic view of the transaction (related to the income flows)
• business transaction = economic events (involving scarce resources) that affect the financial position of the business and it involves at least one financial flow
• the first modern book which documented the double-entry method was written in 1494 by an italian monk called luca pacioli
• the name double-entry relates to the fact that each transaction is analysed under at least two different perspectives and is entered at least twice, recognizing both the "giving" and "receiving" aspects of the exchange according to the different types of views and flows that can be identified and measured

  
• t-accounts are kept in a book called the "ledger book"
• the accounts to be posted depend on the type of views/flows involved within the transaction: financial flows (i.e. cash, payment/receipt) shall be posted into "financial" T-accounts and economic flows (i.e. costs, revenues) shall be posted into "economic" T-accounts
• economic flows represent the increase or decrease in the company wealth (the equity) which can be provided by different types of transactions and they can divided into: income flows and equity flows
• income flows = increases/decreases of company wealth, related to the business and operations, and due to revenues or gains and costs or losses
• equity flows = increases/decreases of company wealth related to operations of the shareholder equity
• in the financial statements at the end of the year, the difference between revenues and costs is entered using an equity account as an increase of equity
• financial accounts are named to state the way in which the payment was made or to remember the area the company needs to pay/receive money and economic accounts are named according to the nature or typology of the economic resource purchased and sold

  
• we can say that everything received (or is going to be received in the future) or used by the company in its activity should be accounted for the in left hand side (debit side) of an account; whilst on the other hand everything that is given out (or is going to be given in the future) by the company should be accounted for in the right hand side (credit side) of an account

  
• the typical accounting books a company uses are: general ledger book, journal book etc.
• business transactions are recorded in the general ledger book on a systematic way and every account describes what happened according to a different business item
• applying the double entry method to record transactions in the ledger book is called "posting"
• the process to figure out the balance of an account is: find all the amounts on the left-hand side and sum them to get the left-hand side total; find all the amounts on the right-hand side and add them to obtain the right-hand side total; compare the two totals and subtract the larger one with the smaller, that is the account balance; cross a line on the account and post this difference on whichever side the larger amount was
• the process of journalizing consists of a summary of all the transactions that have occurred on a day to day basis, pointing out which accounts were posted in the ledger and for what amounts
• the process of collecting, recording, processing and disclosing the accounting information of a company can be described as a cyclical series of steps that is called "the accounting cycle"
• general purpose financial statements are a set of reports, tables and explanatory notes presented periodically by the management of the company to disclose information about the performance and the financial position of the business
• there are three basic period reports: statement of financial position (balance sheet/ BS), income statement (profit and loss statement/P&L) and statement of cash flow. Additionally companies have to publish also the explanatory notes that provide detailed information on accounts, criteria and evaluation methods and other documents
• balance sheet = a list, at a specific date, of the ASSETS owned or controlled by the organization, the LIABILITIES namely the claims against the bussiness'assets by creditors (payables, loans, etc.) and the EQUITY, the owner claims' into the business organization
• the balance sheet can be presented in two formats: the account format (a table with two sides) or a list (vertical) format
• if the balance sheet shows in the Equity the amount of "common stock" (or share capital) it means the company is a corporation because only them issue capital stock and consequently their owners are called stockholders
• the assets are the sources owned by the company
• there are two general types of funds sources: liabilities (amounts owed to creditors) and owners' equity
• the basic accounting equation is ASSETS= LIABILITIES + EQUITY
• considering that funds may come from creditors or from the owners, the balance sheet equation can also be written as: INVESTMENTS = SHAREHOLDERS FINANCING + CREDITORS FINANCING
• in order to show the fact that owners' equity is a residual claim, the same equation can also be written as: NET EQUITY = ASSETS - LIABILITIES