9789144175959

FINANCIAL ACCOUNTING Martonz

Jan Marton

Niklas Sandell

Anna-Karin Stockenstrand

Original title: Redovisning – från bokföring till analys

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1

2

4 The basics of recording transactions and making adjusting and closing entries 49

4.1 Double-entry accounting system 51

4.2 Key concepts of accounting and their link to different account types 55

4.3 Logics related to recording transactions and closing entries – Vent Consulting 57

Part 2

reporting

5 Balance sheet 83

5.1 The link between balance sheet and income statement 84 5.2

This book is intended to be useful for students taking introductory financial accounting courses at university level. Accounting can be seen as an activity that keeps the pulse for an organization, rather like the drums in a rock band.

Introductory courses in financial accounting must balance technical and conceptual content. This book covers both. Double-entry accounting techniques are covered in Chapter 4. Technical aspects of preparation of cash flow statements and consolidated financial statements are found in Chapters 7 and 10. Finally, the technique for calculating ratios in financial statement analysis is covered in Chapter 14.

The main pedagogical idea, however, is that a conceptual understanding of accounting is essential for students. In Part 1, we cover why financial accounting exists and what it is. A conceptual discussion of different financial statements is provided in Part 2, with a particular focus on the balance sheet and the income statement. Contextual aspects, such as regulation and accounting principles, are covered in Part 3. Part 4 discusses different users of financial statements, including what type of information they are interested in. These four parts help students understand the motivation for the actual design of financial accounting and how different concepts relate. The goal is that the student should be able to go beyond a purely technical focus of financial accounting.

The book’s structure builds on the reporting process, from transactions via an accounting system to the preparation of financial statements, and ending with users’ analysis of financial statements. Part 4, which deals with financial statement analysis, can be read separately, as it is not required for an understanding of Parts 1–3.

The book contains several pedagogical features. Text boxes are frequently used, with discussions on current issues in practice and regulation, and accounting research. Each chapter has many examples and concludes with study questions. This makes the book useful for self-study, in addition to being helpful on courses with substantial teacher involvement.

We hope you enjoy reading it!

Eslöv,

Gothenburg and Uppsala, June 2023

The authors

Part 1 Basic issues in accounting

Why accounting?

In the first part of the book, we present an introduction to the subject of accounting by answering a few key questions. This chapter answers the question of why accounting exists including the purpose of accounting. Chapter 2 discusses what accounting is, while Chapter 3 focuses on how accounting is produced (i.e., how to fulfil the purpose of accounting). Finally, we discuss some technical aspects of accounting in Chapter 4. In this introductory chapter, the reader will discover why accounting plays such an important and crucial role in the economy and society as a whole. You will also find out why you should learn accounting; in other words, why you should read the rest of this book.

Accounting is something we regularly encounter in our own everyday lives, which is why it affects us all in a variety of ways. Furthermore, accounting serves as the most fundamental way for organizations to communicate with the outside world on how they are doing. Accounting thus plays a key role for these organizations when it comes to being able to engage in transactions with the outside world, transactions that are needed for their operations. By serving as a basis for decision-making, accounting may also have major socio-economic consequences. So, accounting is important, but it is also subjective. There is not a single “correct” way of doing accounting. This is why it is so important for everyone to understand accounting, in their professional lives as well as in other situations, but also why accounting is so exciting and so much fun.

1.1 Accounting in organizations

This book concerns financial accounting (i.e., accounting produced by organizations for external users). Organizations may here differ in terms of their characteristics. They may be large, listed companies with tens of thousands of employees operating globally or small companies run by the owner him- or herself, with no employees and which only operate locally. Organizations may also be the government, municipalities,

government agencies, foundations, non-profit organizations and churches. The word organization may thus involve different types of actors. In this book, however, we mainly focus on accounting carried out by companies.

The fact that the book focuses on financial accounting means that it does not discuss the kind of accounting produced to facilitate the internal management of organizations, often referred to as management accounting

Financial accounting represents a form of language used as a means of communication to support financial relations between companies and external organizations. The fact that financial relations between organizations serve as the basis for a welldeveloped economy means that accounting plays a crucial role. Proof of this is the vast resources that organizations spend on preparing accounts. There are also many people working with accounting; in fact, large corporations may have thousands of employees working exclusively with accounting.

Another indication of the significance of accounting is what happens when it does not work as intended. Even though accounting works as intended for the vast majority of companies – by reasonably reflecting what goes on in the organization – there are examples where improper accounting may have severe consequences. An early example is the so-called Kreuger Crash in Sweden, which occurred at the beginning of the 1930s and which included incorrect accounting. The Kreuger Crash had a major impact on the Stockholm Stock Exchange and the Swedish business community, but also on subsequent Swedish accounting regulation. Seventy years later, around 2000, similar incidents occurred with regard to Enron in the United States and – on a smaller scale – Prosolvia in Sweden. Another example is the Swedish HQ Bank, whose disputed accounts contributed to the Swedish Financial Supervisory Authority in 2010 deciding to withdraw its permit to carry out banking activities.

Due to the significance of accounting and the fact that organizations are becoming increasingly aware of this significance, many people in the business community stress that accounting has been given a new role. Accounting no longer simply serves as a support function managed by a couple of bookkeepers sitting by themselves, but accounting issues are increasingly discussed among upper management and in board rooms when addressing strategy and governance issues.

1.2 Accounting in everyday life

Accounting is a common phenomenon in the world and in all parts of life, including in people’s personal lives. This is obvious to everyone who has been a student. For many new students at university, this is the first time that they have to take care of themselves entirely on their own. This means that there is a lot to consider, not least when it comes to their personal finances! Keeping track of how much money you actually spend on different things is not always easy, and it may take some time before you get an overview

of where the money is going. You also need to engage in some planning as some costs are to be paid in advance (such as rent) and others after you have consumed the good or service (such as electricity). At the end of the month, you get your study grant and study loan, at which point your rent is to be paid in advance. So far, everything is clear and predictable. However, other types of costs are more difficult to determine. How much money do you spend on food each month? The course literature will often end up costing more than you think, and then the landlord will come and tell you what the electricity bill actually ended up being. It may also be difficult to calculate what you will spend on entertainment and leisure activities, which are obviously very important to a student. In general, it is difficult to get by on your available funds. Figure 1.1 shows what a student’s finances may look like in a typical month.

Most students may not have this kind of written and formal setup, instead having some kind of general idea that there is a balance between the money coming in and the money going out. For most people, however, such a summary is available in the form of a bank statement.

The fact that private individuals do not think all that much about their own accounting is perhaps due to the fact that it often works itself out in some way (for instance, the calculation in Figure 1.1 shows how helpful parents step in and remedy a temporary monthly deficit). However, an organization cannot act in such an unplanned manner. If an organization does not plan and does not have an overview of its finances, it cannot go on operating. One reason may be that those financing the organization withdraw their funding, which will then drain the organization of money. Another reason is that the organization risks losing employees.

As private individuals, we also need to report our finances more formally on a regular basis, which is done to the government in the form of an annual tax return. All individuals are obliged to pay taxes on their income emanating from working, selling

Figure 1.1

Example of a student’s finances for one month.

EXAMPLE 1.1: ACCOUNTING RELATED TO SELLING AN APARTMENT 1.1

Let us assume that I sell an apartment on March 1. Let us also assume that I bought said apartment a few years earlier for EUR 100,000 but that it has now increased in value, which means that I can sell it for EUR 120,000 In connection with the sale, I commission a real estate agent, who charges me EUR 4,000 in fees. This results in a profit of EUR 16,000

(120,000 − 100,000 – 4,000). This represents the profit that the government wants me to pay tax on. The profit is calculated as the selling price minus the previous purchase price and minus expenses related to the sale (the real estate agent’s fee). Hence, we need to produce an account of what transpired when the apartment was sold and what this means in terms of gains or losses.

shares, selling homes, etc. Frequently, private individuals do not need to put all that much effort into this, as employers manage tax payments with regard to wages, banks with regard to interest, etc. In other cases, however, we need to put in a little more work, such as if we sell a home or engage in other business dealings.

We then have to look back and see which events occurred during the year and calculate what we need to pay in tax. Students probably tend to live in student housing, but later in life, and also as a student, it might be that you buy an apartment, a house, securities and other things where you have an obligation to present accounts (see Example 1.1).

In May the year after selling the apartment, it is time for the individual to submit a tax return containing all events affecting taxes for the previous year. Likewise, organizations are obliged to produce a summary of events in the previous year, which is usually presented in an annual report. Such reports are comprehensive and include a variety of summaries of the organization’s finances with a consistent focus on the previous year. Apart from the fact that the organization’s annual report is much more comprehensive and detailed than that of private individuals, there is also another key difference. The private individual’s tax return is submitted to the tax authority and will not be shared with anyone else. For many organizations, on the other hand, the annual report is made public and something a lot of people are interested in. Exactly who is interested in an organization and how they use the accounts is discussed in the following sections. It is also important to mention that many organizations must supplement their accounts by submitting a tax return to the tax authority.

1.3 The organization’s external environment

Accounting constitutes an important aspect of our lives. For organizations, it serves as the primary tool for communicating with the outside world on a regular basis. Questions that the accounts may shed light on include: Is the organization making any money? Is there money in the organization? If so, whose money?

An organization needs a large number of resources to operate. Examples of resources include machines used for manufacturing or having access to employees carrying out work. It is absolutely crucial for the organization to ensure that everyone who in different ways provide resources, and whom the organization thus depends on, continue to be interested in doing so. In order to illustrate that an organization is dependent on several different actors in its external environment, it is commonly said that an organization has different stakeholders.

The so-called stakeholder model captures how the organization is surrounded by different actors and that mutual dependencies exist between these and the organization. The stakeholders have demands and expectations on the organization that must be fulfilled to a sufficient extent for the organization to maintain trust and thereby ensure its survival. Such stakeholders include shareholders who contribute capital and then expect dividends, banks having lent money and then expect to receive interest and that the loans are repaid, customers who pay for products or services, suppliers who supply goods and charge money for these, but also the government, which levies taxes, and the employees in the organization, who expect to be paid for their work. Stakeholders may also be viewed from an even broader perspective, including those indirectly affected by what the organization does, such as trade unions and various associations (see Figure 1.2).

There may also be other types of stakeholders in relation to organizations. For instance, future generations may be considered stakeholders (albeit represented by

Resource is a term used for everything an organization uses in its operations and which may include both physical assets and services used by the company, including the work carried out by employees.

Figure 1.2

Different stakeholders are affected by what goes on in an organization in different ways.

someone else), which highlights the notion that the organization is responsible for its impact on the environment. Another example is that the organization’s operations may have social effects, such as if child labor is used in some part of its operations. In recent years, such issues have become increasingly important and to a great extent concern the legitimacy of an organization – an organization needs to be seen as generally taking responsibility regarding issues that many people find important (see Text box 1.2).

TEXT BOX: LEGITIMACY 1.2

Accounting often focuses on the financial figures as such and whether they offer a good reflection of what goes on in the company. However, there is research indicating that an additional dimension also plays an important role. The efforts to produce accounts in organizations are heavily characterized by an ambition to achieve legitimacy (Aburous 2019). Legitimacy concerns the need to portray the organization in such a way that important actors in the organization’s external environment are sufficiently satisfied to continue supporting the organization in various ways, such as capital providers, employees, customers, etc. (Unerman & O’Dwyer 2006). However, the priorities and values in the external environment are not static but change over time. Therefore, the efforts to be seen as legitimate in the eyes of others is an ongoing activity. What is considered important at one particular point in time may be considered less important at another.

Various types of accounting have long been considered playing an important role in terms of organizations seeking to appear “good” in the eyes of society (Patten 1992). One way of doing so is to present a so ­ called sustainability report (see more on sustainability reporting in Chapter 9). These kinds of notions have also proved to be “contagious” between organizations – if several organizations start to report a certain type of information, the rest of the external environment will soon start to wonder why not everyone is providing the same infor­

mation. That is why it is commonly said that the pursuit of legitimacy in the long run results in uniformity, meaning that all organizations report more or less the same kind of information (Brandau et al. 2013). In essence, this is about organizations presenting an identity that their external environment may accept, understand and approve of. This might include being an organization that takes responsibility for the environment, that the organization is at the forefront in sustainability efforts, takes good care of its employees or is an overall “good” organization (Tregidga et al. 2014).

References

Aburous, D. (2019), “IFRS and institutional work in the accounting domain.” Critical Perspectives on Accounting, 62, pp. 1–15.

Brandau, M., Endenich, C., Trapp, R. & Hoffjan, A. (2013), “Institutional drivers of conformity: Evidence for management accounting from Brazil and Germany.” International Business Review, 22, pp. 466–479.

Patten, D. M. (1992), “Intra-industry environmental disclosures in response to the Alaskan oil spill: A note on legitimacy theory.” Accounting, Organizations and Society, 17 (5), pp. 471–475.

Tregidga, H., Milne, M. & Kearins, K. (2014), “(Re)presenting ‘sustainable organizations’.” Accounting, Organizations and Society, 39 (6), pp. 477–494.

Unerman, J. & O’Dwyer, B. (2006), “Theorising accountability for NGO advocacy.” Accounting, Auditing & Accountability Journal, 19 (3), pp. 1–2.

In this book, however, we focus on the type of accounting aimed at those with direct financial interests in an organization. We discuss these stakeholders further in the following sections.

1.4 Key stakeholders

So far in this chapter, we have talked about organizations to indicate that accounting may originate from many different sources. We have also highlighted that private individuals also produce accounts. From now on, we change our perspective and focus on companies as reporting entities. This means that the choice of stakeholders mentioned in this section is based on those actors typically interested in a company’s accounts. For example, the tax authority is a relevant stakeholder with regard to both companies and private individuals. However, some stakeholders are not included here. For example, parliaments and voters are key stakeholders when it comes to the accounts of governments, but they are not discussed as they do not play a key role from a company perspective.

Owners

Compared to other stakeholders, the company’s owners have a particular interest in the company as they finance its operations and take the greatest risk. At the same time, an owner is the one stakeholder able to control the company.

In a very small company where the owner and the person performing the work are the same, accounting is needed for managing other stakeholders, such as the tax authority. However, accounting is not necessary for the owner to gain insight into and be able to monitor what goes on in the company as he or she actually works there. This, however, is not typically the case in larger companies, where the owner tend not to play an active role in the company’s day-to-day operations.

In larger companies, especially those listed on a stock exchange, the accounts produced are very complex and large in scope. This means that listed companies spend large amounts of resources on producing accounts. Typically, financial accounting is especially important for these companies.

Listed companies are characterized by a large number of owners (investors). This means that the owners often do not have a direct insight into the company, nor do they have any direct contact with upper management. Just because you buy some Volvo shares, you cannot ask questions about the company directly to Volvo’s upper management. At most, the owner can attend the annual shareholders meeting and vote on certain fundamental issues, such as whether the company should merge with another company or whether you think that the board of directors should remain in place. Apart from that, shareholders are not able to influence all that much, apart from perhaps indicating their dissatisfaction with the company by selling their shares.

Company

A company is an organization typically aiming to generate profits for its owner. In legal terms, a company may be operated in different forms.

The fact that there is such a great distance between the owner and the people working in the company means the owner has a hard time getting information on what actually goes on in the company. At the same time, the owner is dependent on this information as he or she invests money in the company. This creates a fundamental problem – a problem that accounting is capable of solving. By preparing accounts, a large amount of information about the company, both in general terms and in detail, may be shared with a large number of owners without them having to meet anyone in the company. This is extremely valuable as it enables the company to have a wide range of owners, from all around the world, who can effectively gain knowledge concerning important events in the company, the company’s strategies, governance and even earnings figures.

In other words, there is a significant degree of information asymmetry (i.e., a difference in terms of how much is known about the company’s operations, see Text box 1.3) between the company’s upper management and its shareholders. This asymmetry is partially offset by means of accounting. It is highly unlikely that stock markets would exist without accounting. In order to buy a share (a right to a share of a company), investors need some basic information, such as the earnings generated by the company.

Investors use accounting to decide whether to buy, keep or sell shares. Investors are primarily interested in future earnings. However, in order to forecast future earnings,

One could argue that the operations of a company are based on the owners’ demands for returns (i.e., what the owners expect to get in return on their investment in the company). By upper management working with aspects such as costs, quality, pricing and governance, the company can achieve the highest possible return for its owners. Using the terminology of principal-agent theory, the owners may in this context be seen as principals and upper management as agents, acting on behalf of the principal. The principal then expects the agent to work on the basis of the principal’s interests. Principal ­ agent theory describes two interrelated problems. The first is that the principal and the agent often have different and even conflicting interests. The second is that getting an insight into what the agent

actually does is often difficult and expensive for the principal (Armstrong et al. 2010). The latter problem refers to what is known as information asymmetry, which tends to be expensive to address as it leads to a need for different types of reporting and incentive systems. A reporting system that is particularly interesting in this book is financial accounting. Based on principal ­ agent theory, there is thus an interest in how to reduce information asymmetry by means of accounting.

Reference

Armstrong, C., Guay, W. & Weber, J. (2010), “The role of information and financial reporting in corporate governance and debt contracting.”

Journal of Accounting and Economics, 50 (2–3), pp. 179–234.

you need information on current earnings. It is not possible to make forecasts without a foundation on which to base them. If, for instance, we know that a company had earnings of EUR 10 million last year, we are able to forecast whether we believe that its earnings will increase or decrease this year. Not having access to information on what has happened in the past makes forecasting much more difficult. Accounting provides information on earnings in the previous year and further back in time.

Consequently, individual investors in the stock market benefit greatly from accounting. But the economy as a whole also benefits from the fact that listed companies produce accounts. Accounts enable investors to invest their capital in the companies with the greatest potential. Transferring capital to companies – and industries – with a good growth potential enables the overall economy to grow faster.

What has been said here about investing in listed companies also applies to investing in shares in unlisted companies. Here too, shares are bought and sold, and accounting serves as an important basis for carrying out such transactions. The conclusion is that without accounting, capital markets as we know them would not exist and the overall world economy would be much smaller.

Banks and other creditors

Banks and other creditors lend capital to companies, and they obviously want these companies to be able to repay their loans. In order to evaluate a company’s ability to pay back, information is needed as to which resources the company controls and its capacity to generate earnings. This information is presented in the accounts. Consequently, accounting facilitates decisions on whether to lend out capital.

Just as in the case of owners, accounting not only facilitates the decisions of the individual bank, it also improves the overall economy. Through accounting, loans will be granted to the companies in the best position to repay them, which ought to be the companies capable of growing in the future. This, in turn, bolsters overall economic growth.

An important difference between shareholders in listed companies and banks is that the latter face a lesser degree of information asymmetry. Banks often have direct communication with the company’s upper management and may require additional information as a condition for lending. This means that accounts are less essential for banks compared to investors buying shares. It is also a historical fact that countries where there has traditionally been a great deal of financing through banks (e.g., Germany) have had less strict requirements regarding financial accounting than countries that have traditionally had large stock markets (e.g., the United States). Still, lending from banks would be more difficult – and thus more expensive – if there were no general accounts that the banks could use for making their decisions.

The tax authority

The previous examples of users of accounting have focused on those financing the company’s operations. In these cases, accounts are useful for the companies themselves as the accounts enable them to obtain the capital needed for their operations. The tax authority, on the other hand, collects taxes, and this is not an activity that the companies themselves benefit from – at least not directly. In order to see the benefits of accounting in this case, we need to focus on the benefits for the overall economy.

With regard to income taxes (both for private individuals and for companies), the basic principle is that higher earnings should result in higher taxes. This principle presupposes that it is possible to determine the amount of earnings. For companies, this means that the taxable income needs to be calculated, which, in turn, requires accounting.

What would the tax system look like without accounting? One alternative would be to decide, for example, that all limited liability companies were to pay an annual tax of EUR 100,000, regardless of earnings (as it would not be possible to calculate earnings without accounting). However, the legitimacy of the tax system would probably suffer if large companies with billions in profits paid as much tax as a small company made up of a single individual. In addition, the majority of small companies would probably move abroad to avoid the (for them) high tax. Accounting thus constitutes a key element in a politically legitimate tax system.

Employees

Employees may be seen as a group of stakeholders, even though they exist within the organization. The relationship between the organization and its employees is complex in several ways. Employees are probably primarily interested in getting a good salary, but they certainly also want other things as well, such as a secure job position, good working hours and being able to work on the basis of their professional values or achieving personal career goals. The company’s accounts serve as support for the employees in terms of assessing the scope for wage increases before wage negotiations, assessing job security based on whether the company’s finances are such that operations may continue in the long term, etc. In practice, trade unions often represent employees and are thus able to use these accounts as support for making such assessments.

Customers and suppliers

Customers may primarily use accounting to determine whether their counterparty is financially stable and thus able to deliver what has been ordered. This is particularly important when purchasing complex products, such as when investing in system

solutions, where customers make themselves dependent on a supplier for many years. Suppliers may use accounts to assess the customer’s ability to pay – will the customer pay for what we deliver? Suppliers thus have an interest similar to that of banks and other creditors, albeit typically based on a shorter time frame.

1.5 Why you should study accounting

After discussing why accounting plays an important role for companies and other organizations as well as for private individuals, here are some reasons why you should study accounting. The first reason is that accounting is fun. Many people think that even though accounting may be important and useful, it is not all that much fun. This is linked to the view of accounting as a boring and tedious subject based on figures and calculations. However, accounting is about relationships between organizations and thus also about relationships between the people operating within organizations. Adopting this perspective, accounting becomes something extremely fascinating and challenging – how is an organization to present a picture of its operations and the work carried out by the people in the organization in order to create and maintain trust between the organization and its external environment? There are no obvious right and wrong approaches here, but accounting contains a variety of different judgments and considerations (i.e., a certain measure of subjectivity). Had there been a “right” way of accounting, it could have been made more or less automated and managed by experts. But this is not the case. And as different ways of accounting have far-reaching effects, accounting is anything but boring. One example of the effects of accounting is that when major banks present large profits, politicians tend to start discussing special taxes on banking activities.

The second reason why you should learn accounting is that it is not something that only experts should know. Many people believe that accounting is only important for those wanting to become experts in this particular area. In a way, this is true – one example is that understanding the accounts of a listed company is almost impossible without being an expert in accounting. However, perhaps precisely due to this fact and in light of the importance of accounting in our everyday lives, we argue that it is crucial for everyone to have at least some understanding of accounting in order not to be put at a disadvantage in relation to the various experts in this field. This is important in many different situations. Accounting is often used in the political debate as a basis for various decisions, such as when discussing the size of the government’s budget deficit. As voters and citizens, it thus becomes crucial to have knowledge of accounting to understand how calculations are made and which assumptions form the basis of the figures presented in order to decide between different alternatives. Knowledge of accounting is also important for employees. Accounting is often used as a basis for internal discussions in organizations. Those who do not work directly

with accounting, but perhaps in the areas of marketing, sales or human resources, need to be able to understand what the different figures represent in order not to be put at a disadvantage. Even highly specialized professionals highlight the increasing importance of accounting; for example, physicians and teachers increasingly need to understand and manage accounting in their work.

The third reason why you should learn accounting is that it is not as difficult as people say. Sure, many people find accounting difficult, but this often concerns a threshold you need to overcome. As mentioned above, accounting is a kind of language, and just like other languages, you initially need a great deal of time to acquire the basic terminology and grammar forming the basis of the language. Once you have gotten past this first threshold, you have come a long way. This is done by continuing to read this book.

Conclusion

In this chapter, we have answered the question of why accounting is important. As a background, we highlight that organizations (e.g., companies, government agencies, non-profit organizations) as well as private individuals need to engage in accounting on an ongoing basis.

We also discussed companies’ relationships with their external environment and various stakeholders. Accounting represents a systematic way of presenting information about the company to stakeholders. Owners invest in the company and creditors lend out money to the company. As a result, both these stakeholders need accounting to keep up with what is happening with their investment or loan. The tax authority needs accounting to make decisions regarding taxation. Other stakeholders include employees, customers and suppliers.

STUDY QUESTIONS

1 What is a stakeholder of a company?

2 For which decisions do owners need accounting?

3 For which decisions do creditors need accounting?

4 What is the effect of accounting on the overall economy with regard to owners and creditors?

5 Which decisions does the tax authority base on accounting?

6 Why are customers interested in accounting?

7 Why should you learn accounting?

What is accounting?

After having read Chapter 1, we have hopefully convinced you that accounting is an important phenomenon, while we have also presented you with answers as to why accounting exists. The next natural question is what accounting is all about. This chapter begins with a definition of accounting, which we then develop further as we look at accounting in more detail as a process. This is followed by a discussion of the types of actors involved in accounting in practice. The chapter presents a framework of what accounting entails, and at the end of the chapter, we link this framework to the overall structure of the book. This is natural, as the theme of this whole book in some sense concerns what accounting is all about.

2.1 A definition of accounting

The previous chapter described why accounting is needed in a broad sense, namely to provide a company’s stakeholders with information on what goes on in the company. This, in turn, is necessary for the stakeholders wanting to engage in transactions with the company, which is ultimately necessary for an efficient economy on an overall level. Accounting may involve a large number of different aspects. Here, however, we focus on financial accounting presented by companies to external stakeholders. The focus is then on so-called financial statements, which include income statement, balance sheet, cash flow statement and notes (the latter explain the figures in the other statements in more detail). A possible definition of accounting is thus:

the activity of recording transactions, resources and claims, as well as to, supplemented with additional information, present a summary in the form of financial statements.

So, accounting covers the entire process from recording and creating meaningful categories of information to interpreting this to make it understandable and relevant to prospective users of the accounts.

JAN MARTON is an associate professor at the School of Business, Economics and Law, University of Gothenburg. He previously worked as an accounting specialist at KPMG and an auditor at Deloitte.

NIKLAS SANDELL is a senior lecturer at Lund University School of Economics and Management. He previously worked as a corporate finance advisor at PwC and as a financial & legal controller at Aspiro.

ANNA- KARIN STOCKENSTRAND is an associate professor at the Centre for Research on Economic Relations at Mid Sweden University. She has also worked at KPMG, specializing in accounting and regulations.

FINANCIAL ACCOUNTING

Financial accounting is a process that goes from the company’s transactions, through the accounting system and production of financial statements, to the use and analysis of the information by external parties. The analysis of financial statements is the basis for many important decisions. This book explains the fundamental role of financial accounting in the economy.

The book covers both technical and conceptual aspects of financial accounting. The double-entry accounting system forms the technical base of financial accounting. There are also chapters that explain how to prepare a cash flow statement and consolidated financial statements. Learning how to analyze financial statements is supported by hands-on calculation of important ratios.

The book has a strong conceptual focus, emphasizing that an understanding of concepts is necessary for a full understanding of financial accounting. It starts with a discussion of the functions of financial accounting, and the reason it exists. There is a substantial focus both on how different financial statements are linked and the conceptual meaning of the items in those statements. Accounting principles are discussed. Finally, the conceptual meaning of different ratios is discussed from a financial statement user perspective.