Finanical Accounting Concepts Phase 1 DB - Essay Example

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. ManagersManagers need accounting information for the purpose of planning, forecasting and managing the business. 2. EmployeesEmployees need accounting information to evaluate their future careers in the company and also to know about the future benefits.3. ShareholdersThe shareholders need accounting information to determine the division between the value of investment, the estimated dividend and the capital gain.

4. InvestorsInvestors or the debtors need accounting information to assess the risk & the potentials of the company for further investments.5. Creditors – SuppliersThe creditors which are mainly suppliers, need accounting information to know the ability of the company to pay them back.6. BankersBankers 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 AuthoritiesVarious government authorities require accounting information for tax, research, audit and other purposes. 8. Financial AnalystsFinancial Analysts like stock brokers and credit rating agencies require accounting information for analyzing, forecasting and credit rating purposes.9. AuditorsThe auditors require accounting information to give opinion on the accounts & to keep an evidence of the audit work and also to keep a check on the companies.10. Stock ExchangeFinally, 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 EquityThis 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 EquityThese terms are defined in detail below.AssetsAssets 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. LiabilitiesLiabilities 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 EquityThe 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 CorporationsThe different characteristics of the sole proprietors, partnerships and corporations make them different from each other. These characteristics are as under:Sole proprietors: 1. Single owner2. Unlimited liability of owners3. Private companies4. Not included in the stock exchange5. Inexpensive to organizePartnerships: 1. Two or more owners2. Profit and loss is divided according to the agreement made when the partnership is created3.

Unlimited liability4. Private companies5. Not included in the stock exchange6. Inexpensive to organizeCorporations: 1. Stockholders own the business2. Limited liability3. Public companies4. Issue stocks5. Expensive to organize6. Double taxed; a. Tax on the corporation’s earningsb. Tax on the stockholder’s dividendsBibliography:1. J. Weygandt, E. Kieso & D. Kimmel. (2002). Accounting Principles. 6th edition. New York: John Wiley & 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