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Financial Accounting Overview

Luca Pacioli (1445-1517) “The Father of Accounting” was the first person to record and standardize the practices merchants used to track their assets and liabilities. This was included as one of five parts in his book “Everything about Arithmetic, Geometry and Proportions”, which served as the only known accounting textbook until the 16th Century. He also tutored Leonardo da Vinci mathematics in his spare time.

Economics teaches that wants exceed resources; Accounting provides the tools for the efficient utilization of limited resources. The efficient use of resources determines the success of a business or whether if even survives. Accounts must measure performance with accuracy and timeliness so that resources both human and monetary can be allocated efficiently.

Accounting is the identification, measurement, and communication of economic information about entities to interested parties. Financial accounting is the process that generates reports for internal and external parties. Managerial accounting is the process that generates reports on information needed by internal users to evaluate, plan and control an economic entity.

General purpose financial reporting provides financial information about the reporting entity that is useful to present and potential investors, lenders, and other creditors in decision making about providing resources to the entity; the decisions involving buying, selling or continued holding of equity and debt instruments, as well as other forms of credit. This information is also useful to other stakeholders in the business.

To define the scope of reporting an entity perspective is used; all assets, obligations, revenues, expenses, and other financial aspects of the business entity are accounted for separately from its owners. In other words, the company has an identity distinct from its owners and managers; it is an economic and legal unit.

Financial statements are the primary way that companies transmit financial information to outside parties. The most common financial statements are:

  • the Balance Sheet
  • the Income Statement
  • the Statement of Comprehensive Income
  • the Statement of Cash Flows
  • the Statement of Owner's Equity
  • Note Disclosures