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Accounting: formally defined as a system of providing “quantitative information, primarily
financial in nature, about economic entities that is intended to be useful in making economic
decisionsâ€Â
o An accounting system is used by a business to handle routine bookkeeping tasks and to
structure the information so it can be used to evaluate the performance and status of
the business
o Numbers: accounting is quantitative, this is strength because numbers can be easily
tabulated, but also a weakness because important business events (e.g. a toxic waste
spill and associated lawsuits and countersuits) cannot be easily described by numbers
o A financial dimension: the status and performance of a business is affected by and
reflected in many dimensions (financial, personal relationships, community and
environmental impact, public image); accounting only focuses on finances
o Usefulness: accounting exists only because it is useful
o Future decisions based on past information: although accounting is the structured
reporting of what has occurred, this past information can only be useful if it
impacts decisions about the future
o Balance sheet
▪ Reports the resources of a company (the assets), the company’s obligations (the
liabilities), and the owners’ equity, which represents how much money has been
invested in the company by its owners
â–ª Assets = Liabilities + Equity
o Income statement
â–ª Reports the amount of net income earned by a company during a period, with
annual and quarterly income statements being the most common
• Net income is the excess of a company’s revenues over its expenses; if
the expenses are more than the revenues, then the company has
suffered a loss for the period
▪ The income statement representsthe accountant’s best effort at measuring the
economic performance of a company
▪ Revenue – Expenses = Net Income
o Statement of Cash Flows
â–ª Reports the amount of cash collected and paid out by a company in the
following three types of activities: Operating, Investing, and Financing
• The most objective of the financial statements because it involves a
minimum of accounting estimates and judgments
• Provide information about the past that will help decision makers;
evaluate the results of past decisions, and project the effect of future
decisions
â–ª Report of cash coming in (being earned e.g. revenues, loans, etc.) and cash going
out (being spent, e.g. buying new buildings, paying back loans, etc.)
- External Users of Accounting Information
o Lenders are interested in one thing – being repaid with interest; often ask for
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