Finanical Accounting Concepts Phase 1 DB

Financial Accounting Concepts” Phase DB Users of Accounting Information The accounting information is used by a number of people, within and outside the organization. The various users of accounting information and the purpose of the information that they need are as under:
1. Managers
Managers need accounting information for the purpose of planning, forecasting and managing the business.
2. Employees
Employees need accounting information to evaluate their future careers in the company and also to know about the future benefits.
3. Shareholders
The shareholders need accounting information to determine the division between the value of investment, the estimated dividend and the capital gain.
4. Investors
Investors or the debtors need accounting information to assess the risk &amp. the potentials of the company for further investments.
5. Creditors – Suppliers
The creditors which are mainly suppliers, need accounting information to know the ability of the company to pay them back.
6. Bankers
Bankers need accounting information for the purpose of assessing the financial health of the company for granting loan etc and also to assess company’s ability for loan repayments and markup.
7. Government Authorities
Various government authorities require accounting information for tax, research, audit and other purposes.
8. Financial Analysts
Financial Analysts like stock brokers and credit rating agencies require accounting information for analyzing, forecasting and credit rating purposes.
9. Auditors
The auditors require accounting information to give opinion on the accounts &amp. to keep an evidence of the audit work and also to keep a check on the companies.
10. Stock Exchange
Finally, the stock exchange needs accounting information to see the compliance of its requirements.
The Basic Accounting Equation
The basic accounting equation is expressed as follows:
Assets = Liabilities + Owner’s Equity
This equation is always true for any accounting transaction i.e. the right side is always equal to the right side.
This equation consists of three elements, namely.
1. Assets
2. Liabilities
3. Owner’s Equity
These terms are defined in detail below.
Assets
Assets are what an organization owns and these are of value to the organization. Assets are like a resource to the company. These resources and belongings to the organization may consist of plant, cash, inventory, receivables, patents etc. Assets are used for the investments that businesses make.
Assets are tangible as well as intangible. Tangible assets include cash, inventory, receivables and supplies etc. whereas, intangible assets include patents, goodwill etc. Whether assets are tangible or intangible, they always equal to the liabilities and the owner’s equity.
There also exists long term and short term assets. The long term assets are of maturity which is more than a year and the short term assets are those which are categorized in having less than a year maturity.
Liabilities
Liabilities are what an organization owes and are an obligation to the company. Liabilities are, in fact, claims by the creditors on the assets possessed by any business. All the payables (accounts payable, notes payable etc), loans, mortgages, salaries and the like that the company owns are included in the liabilities. Liabilities are also called debts.
Liabilities include short term and long term liabilities. The long term liabilities are those which are to be paid after a year and the short term liabilities are those which are to be paid within a year.
Owner’s Equity
The amount invested by the investors or the owner’s contributions in the organization is known as the owner’s equity. This is the owner’s rights to the assets of the company. In other words, it is the amount of assets invested by the owner into the business. The owner’s equity includes the capital, drawings, common stock, preferred stock, treasury stock, additional paid-in capital and retained earnings account.
Differences between Sole Proprietors, Partnerships and Corporations
The different characteristics of the sole proprietors, partnerships and corporations make them different from each other. These characteristics are as under:
Sole proprietors:
1. Single owner
2. Unlimited liability of owners
3. Private companies
4. Not included in the stock exchange
5. Inexpensive to organize
Partnerships:
1. Two or more owners
2. Profit and loss is divided according to the agreement made when the partnership is created
3. Unlimited liability
4. Private companies
5. Not included in the stock exchange
6. Inexpensive to organize
Corporations:
1. Stockholders own the business
2. Limited liability
3. Public companies
4. Issue stocks
5. Expensive to organize
6. Double taxed.
a. Tax on the corporation’s earnings
b. Tax on the stockholder’s dividends
Bibliography:
1. J. Weygandt, E. Kieso &amp. D. Kimmel. (2002). Accounting Principles. 6th edition. New York: John Wiley &amp. Sons, Inc.
2. Bean Counters Dave Marshall (n.d.). So, you want to learn Bookkeeping! Lesson 6: Financial Statements. Retrieved July 9, 2007, from Web site: http://www.dwmbeancounter.com/tutorial/lesson06.html