(ACT) Accounting Module Overview

Accounting Module Overview

Introduction

image of arrow pointing up in front of a world captioned: accountingThe only way to know whether a business is succeeding or failing is by looking at the data. The data is provided to a business owner or manager through the accounting system. The accounting system for a business consists of a cycle of steps that recur each fiscal period ending with the production of financial statements. The financial statements, a summary of all activity for a fiscal period, can be compared from fiscal period to fiscal period, from company to company, and across industries. Accounting information is used internally by managers, owners, and employees, and externally by creditors, tax authorities, investor, customers, and regulatory authorities.

Essential Questions

  • What are the financial statements of a business and what do they tell me?
  • What does each step in the accounting cycle accomplish?
  • What are debits and credits?
  • What are the possible sources of income for a business?
  • How can spreadsheet software help me prepare and analyze financial statements for a business?

Key Terms

  1. Accounting - The action or process of keeping financial accounts
  2. Cycle - the steps involved in accounting for all of the business activities during an accounting period
  3. Accounting equation - the most fundamental equation of double-entry bookkeeping system, it expresses the relationship between what is owned and what is owed by an entity
  4. Assets - A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit
  5. Liabilities - a liability is defined as an obligation of an entity arising from past transactions or events
  6. Owner's equity - owners' interest in the assets of a business
  7. Capital - relating to or being assets that add to the long-term net worth of a corporation
  8. Debit - listed on the left-hand side or column of an account. Debit affects the balance in the account by adding to the balance
  9. Credit - listed on the right-hand side or column of an account. Credit affects the balance in the account by taking away from it
  10. Revenue - income that a company receives from its normal business activities
  11. Expenses - Costs that are matched with revenues
  12. Income statement - a financial statement that gives operating results for a specific period
  13. Balance sheet - A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time
  14. Statement of owner's equity -  financial statement that shows the effect of net income and owner withdrawals on the owner's interest in the business
  15. Cash flow statement - financial statement that displays cash inflows and outflows for a period
  16. Vertical analysis - calculations of elements of the income statement as a percentage of net sales or elements of the balance sheet as a percentage of total assets
  17. Horizontal analysis - calculation of the percentage of change between accounting periods for elements of the income statement or balance sheet
  18. Liquidity ratios - measures of a businesses ability to pay debts in the short term
  19. Profitability ratios - measures a businesses ability to use assets to create a profit
  20. Solvency ratios - measures a businesses ability to pay debt in the long term

Module Minute

Debit, credit, asset, liability, equity, revenue, expense, net income…accounting is often called the language of business.  Are you ready to speak it?  As with any language, words have meaning that everyone must understand and people in the business world need to speak the jargon of accounting.  After all, accounting does address the financial state of a business.  Since profit is the reason people go into business in the first place, understanding accounting helps business owners and managers assess the state of the business and make decisions based on that assessment. If you went to a foreign country and did not understand the language, you would have a hard time accomplishing even the smallest task. The same principle is true in business. Without knowing the language of accounting, you will have a hard time accomplishing anything in business.

[CC BY 4.0] UNLESS OTHERWISE NOTED | IMAGES: LICENSED AND USED ACCORDING TO TERMS OF SUBSCRIPTION