Q. What is an Accounting?
A. Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business entity. It provides a systematic way to track the financial activities of an organization, enabling stakeholders to make informed decisions.
Accounting Principles: Stock Market
Accounting involves recording, summarizing, analyzing, and reporting financial transactions of a business entity. So, before diving into the stock market, it's crucial to understand some basic accounting terms to grasp how companies operate and how their financials can impact stock prices. Here are some fundamental terms:
1. Revenue: This is the total amount of money a company earns from its business activities, such as selling products or services.
| Formula | Example |
|---|---|
| Revenue = Price per unit * Quantity sold | If a company sells 100 units at ₹10 each, revenue = ₹10 * 100 = ₹1000 |
2. Expenses: These are the costs incurred by a company to generate revenue. Expenses can include things like salaries, rent, utilities, and the cost of goods sold (COGS).
| Formula | Example |
|---|---|
| Total Expenses = Cost of Goods Sold + Operating Expenses | COGS = ₹500, Operating Expenses = ₹300, Total Expenses = ₹500 + ₹300 = ₹800 |
3. Profit: Profit is what remains after subtracting expenses from revenue. If expenses are less than revenue, the company has a profit. If expenses exceed revenue, the company has a loss.
| Formula | Example |
|---|---|
| Profit = Revenue - Total Expenses | If revenue = ₹1000, expenses = ₹800, then profit = ₹1000 - ₹800 = ₹200 |
4. Net Income: This is the total profit or loss of a company after deducting all expenses, including taxes.
| Formula | Example |
|---|---|
| Net Income = Revenue - Total Expenses - Taxes | If revenue = ₹1000, expenses = ₹800, taxes = ₹50, then net income = ₹1000 - ₹800 - ₹50 = ₹150 |
5. Assets:
Assets are resources owned by a company that have value and can be used to generate future economic benefits. Assets can be tangible, such as cash, inventory, equipment, and property, or intangible, such as patents, trademarks, and goodwill. They are typically classified into two categories: current assets and non-current assets.
Current assets are those expected to be converted into cash or used up within one year, such as cash, accounts receivable, and inventory. Non-current assets are long-term assets expected to provide benefits beyond one year, such as property, plant, and equipment.
In-short: Resources owned by a company with future economic benefits. Includes current assets (short-term) and non-current assets (long-term).
| Formula | Example |
|---|---|
| Assets = Liabilities + Equity | If liabilities = ₹400, equity = ₹600, then assets = ₹400 + ₹600 = ₹1000 |
6. Liabilities:
Liabilities represent a company's obligations or debts owed to external parties. Similar to assets, liabilities can be classified as current liabilities and non-current liabilities.
Current liabilities are debts due within one year, such as accounts payable, short-term loans, and accrued expenses. Non-current liabilities are long-term obligations extending beyond one year, such as long-term loans and bonds payable.
In-short: Obligations owed by a company to external parties. Includes current liabilities (short-term) and non-current liabilities (long-term).
| Formula | Example |
|---|---|
| Liabilities = Assets - Equity | If assets = ₹1000, equity = ₹600, then liabilities = ₹1000 - ₹600 = ₹400 |
7. Equity:
Equity, also known as owner's equity or shareholders' equity, represents the residual interest in the assets of a company after deducting its liabilities. It is the ownership stake in the company held by shareholders.
Equity can be further divided into various components, including common stock, additional paid-in capital, retained earnings, and accumulated other comprehensive income. Retained earnings represent the cumulative profits earned by the company that have not been distributed to shareholders as dividends.
In-short: Residual interest in assets after deducting liabilities. Represents ownership stake held by shareholders.
| Formula | Example |
|---|---|
| Equity = Assets - Liabilities | If assets = ₹1000, liabilities = ₹400, then equity = ₹1000 - ₹400 = ₹600 |
* Balance Sheet, Income Statement, and Cash Flow Statement are indeed account terms, but they are also specific financial statements used by companies to report their financial performance and position.
8. Cash Flow Statement: This statement tracks the inflow and outflow of cash from operating, investing, and financing activities. It provides insights into how well a company manages its cash.
| Formula | Example |
|---|---|
| Cash Flow = Cash Inflows - Cash Outflows | If cash inflows = ₹1200, cash outflows = ₹1000, then cash flow = ₹1200 - ₹1000 = ₹200 [Positive] |
| If cash inflows = ₹1000, cash outflows = ₹1200, then cash flow = ₹1200 - ₹1000 = -₹200 [Negative] |
9. Income Statement: Also known as a profit and loss statement, this financial statement summarizes a company's revenues, expenses, and profits or losses over a specific period, usually a quarter or a year.
| Formula | Example |
|---|---|
| Income = Revenue - Total Expenses | Revenue = ₹1000, expenses = ₹800, then income = ₹1000 - ₹800 = ₹200 |
10. Balance Sheet: This is a financial statement that provides a snapshot of a company's financial position at a specific point in time, showing its assets, liabilities, and equity. These statements are usually published at the end of the company's fiscal year and are included in the company's annual report.
| Formula | Example |
|---|---|
| Assets = Liabilities + Equity | Assets = ₹1000, liabilities = ₹400, equity = ₹600 |
Remember: In general, balance sheets are published annually as part of a company's financial statements. These financial statements typically include the balance sheet, income statement, statement of cash flows, and statement of changes in equity.
These concepts are fundamental to understanding a company's financial position, performance, and cash flow. They form the basis of financial reporting and analysis, helping stakeholders make informed decisions about investments, financing, and operations.
Note: It's essential to remember that these formulas are simplified representations, and actual financial analysis may involve more complex calculations and considerations.
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