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:

        Managerial accounting
This 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.

        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. This tutorial will focus on financial accounting.

Conflicts of Interest
Different users of financial statements have different needs and objectives.

For example, from the point of view of suppliers and prospective investors, financial statements should aim to provide as full and as fair a disclosure of the state of the organization as possible. An organization, however, exists to maximize the wealth of its stockholders, so the stockholders naturally prefer financial statements that result in the highest possible stock price.

Management might be tempted to prepare financial statements that paint the organization in a flattering light: their personal remuneration is often linked to profitability. Management will also try to minimize the cost of capital to the organization. The less risky the organization, the lower the rate of return investors require, so management may attempt to 'smooth' profits over time by using discretionary accounting techniques that may or may not be appropriate.

It is the role of external auditors to review the financial statements and report whether or not, in their opinion, they reflect a 'true and fair view' of the organization. Recent scandals, such as the collapse of Enron, have focused attention on accounting practices, conflicts of interest, and the role of the external auditor.

Elements of financial statements

²       Assets
you can think of an asset as something the entity owns.
More formally, an asset is an economic resource controlled by the enterprise form which it expects to derive economic benefits in the future.
Assets can be categorized by maturity: fixed assets (such as property, plant, and equipment)have a life of more than one year, while current assets(for example, cash ,inventory, accounts receivable(debtors))have a lift of up to one year. there is also a category known as intangible assets for example, patents and copyright.

²       Liabilities

A liability is an obligation of the enterprise (things it owes)
the settlement of which will result in an outflow of economic resources in the future, Current liabilities(such as accounts payable and bank overdrafts)have a life of up to one year. while long-term liabilities, such as a bank loan, have a life in excess of one year.

²       Equity

Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. Equity represent what the business owes back to its owner. If the entity is a company, then equity is known as shareholder's equity(or shareholders' funds ).Equity is also referred to as net assets.

The Accounting Equation
Before we take a look at other elements of financial statements, let us understand the accounting equation. At any point in time the total assets of an organization is equal to the contribution of its owners(equity) and creditors( liabilities ).this gives rise to the accounting equation that can be expressed as follows:

Equity= Assets- Liabilities
the equity figure is what the business 'owes' its owners.
Example
If a company has 100,000,000 worth of assets and 60,000,000 of liabilities. then its (shareholders')equity is:

Equity=Assets-Liabilities
         = 100,000,000-60,000,000
         =40,000,000
If the company were to pay a cash dividend of 1,000,000,then cash(an asset)would fall by 1,000,000 and equity would fall to:
99,000,000-60,000,000=39,000,000

As the owner (shareholders) have effectively withdrawn funds from the business, the company 'owes' them 1,000,000 less. If on the other hand. the company raises funds by issuing common stock of 10,000,000.assets(cash) and equity would rise by the same figure. in this case, the company 'owes' its owners 10,000,000 more.

²       Revenue
Revenue or income represents the income that a business generates through selling goods or providing a service. It can also include rent if a business lets out some if its premises, or dividend and interest if a business has invested in another enterprise or lent funds(or invested in fixed income securities).

²       Expenses
Expenses are the costs associated with running a business. for example, wages ,electricity, telephone, depreciation, etc.

²       Gains
Gains represent increases in equity arising from transaction outside of an entity's normal operating activity, for example, a profit ion the sale of a fixed asset, dividend income, and so on.

²       Losses
Losses represent decreases in equity arising from transaction outside of an equity’s normal operating activity. for example, a loss on the sale of a fixed asset.

Double-Entry Bookkeeping and the Accounting Equation
Financial statements are prepared according to the double-entry system. This is a system that accountants and bookkeepers use to record transactions.

In double-entry accounting, every transaction has two journal entries: a debit and a credit. Debits must always equal credits. For example, when a company purchases inventory on credit it must debit the asset account (inventory) and credit the liability account (creditor).

Using the double-entry system means that the balance sheet can be presented simply in the form of the accounting equation. The two aspects of each financial transaction (debit and credit) are identified and recorded in this equation.

Financial Statements
There are three financial statements that form part of any company's annual report:

Ø        Balance Sheet
the balance sheet is a list of the equity's assets and claims against those assets. it provides a picture of the financial position of an organization at a specific point in time.
For example, the balance sheet 'as dec31 20x6 for Nashiville corp. an engineering firm, shows the accumulated results of an organization’s activities from the date on which it started to trade. up until Dec. 31 20x6 .
Balance Sheet of Nashville Corp. as at Dec 31,20x6

Balance Sheet of Nashville Corp. as at dec 31,20x6      
Balance Sheet of Nashville Corp. as at dec 31,20x6      
ASSETS                                                        LIABILITES    
FIXED ASSETS                                              BANK LOANS AND OVERDRAFTS 235,000.00   
PLANT AND MACHINERY 332,000.00            ACCOUNTS PAYABLE 125,000.00   
-DEPRECIATION 83,200.00                          ACCRUED CHARGES 175,000.00   
BUILDINGS 290,000.00                                 TOTAL LIABILITES 535,000.00   
LAND 210,000.00     
INTANGIBLE ASSETS 181,200.00     
TOTAL FIXED ASSETS 930,000.00     

 (181,200.00 -83,200.00 +332,000.00 +290,000.00   +210,000.00  )   
      
CURRENT ASSETS      
CASH 200,000.00     
ACCOUNTS RECEIVABLE 300,000.00  STOCKHOLDERS'EQUITY    
PREPAYMENTS 50,000.00             COMMON STOCK 700,000.00   
INVENTORY 150,000.00               RETAINED EARNINGS 395,000.00   
TOTAL CURRENT ASSETS 700,000.00 TOTAL EQUITY 1,095,000.00   
TOTAL ASSETS 1,630,000.00  (  930,000.00   +   700,000.00)    LIABILITIES+STOCKHOLDERS'EQUITY 1,630,000.00

the balance sheet should always balance, that is, assets less liabilities should always equal equity(or assets should always equal the sum of liabilities and equity).

Fixed assets are assets not held for resale but for continuing use by the organization (land and buildings, plant, and machinery for example) most fixed assets are subject to depreciation charges.

Depreciation is an estimate of the cost of the wearing out of fixed assets as a result of use, passage of time, and obsolescence

Intangible assets are assets that are not physical in nature, for example copyrights, patents, intellectual property or goodwill.

Accounts payable are amounts owned to suppliers.

Accrued charges represent expenses the organization has incurred but that remain unpaid; for example, bills such as telephone and electricity, which remain unpaid but which properly relate to the accounting period in question.

Current assets are cash and other assets that the organization expects eventually to turn into cash (for example, inventory) they are strictly speaking, defined as any asset other than a fixed asset.

Prepayments represent the difference between the amount of the cash payment and the charge to be taken against profit. Prepayments are expenses paid for in advance and are classified as current assets in the balance sheet.

Inventory can be raw materials, finished items already available for sale, or those in the process of being manufactured, Inventory is considered a current asset, and shown on the balance sheet, generally at cost.

Stockholders' equity is the net worth of an organization, it is also known as equity or capital. Equity comes from investment in the organization by the stockholders. Along with accumulated net profits of the organization that have not been paid out to the stockholders. equity essentially represents amounts owed to stockholders.

Common stock is the finance provided to a company by its stockholders. The residual profits of the organization after all expenses have been paid belong to the common stockholders.

Retained earning (or retained profit) are the accumulated profits of the organization.

Ø        Income Sheet
income statement(or profit and loss account) summarizes an organization's income(as earned)and expenditure(as incurred) over the accounting period. for example, the income statement for the year ended dec31 2006 summarizes Nashville Corp's income and expenditure over that accounting period.